Are you looking to apply for a second mortgage but unsure where to start? Purchasing a property is already a complex process, so this article outlines the steps for a second mortgage application, allowing you to familiarize yourself with the process and feel confident to move forward with ease.
What is a second mortgage loan?
There are different types of second mortgage loans. Simply put, these are typically:
To invest in purchasing a second home for vacation or rental purposes.
In addition to a primary loan and deposit, to split the costs on one property at the time of purchase.
In addition to a primary loan, in a property you already own.
What to consider when applying for a second mortgage?
A second mortgage is a great investment in an additional property or can be a cost-effective solution for your primary property, however, it is still a major financial commitment. Before applying for a second mortgage, some factors should be taken into consideration to find the right product for you and to prepare yourself as much as possible. Organization and knowledge will help for a much smoother process and prepare you for any unforeseen bumps on the road.
Firstly, it is important to understand what the second mortgage is for and why you are choosing a second mortgage. The purpose of the second loan will affect the application, the type of mortgage you apply for, the taxes you need to pay, and the insurance you require. These details are important for the mortgage lender so they can advise you on the best options that are available to you.
It is also important to consider your finances when opting for a second mortgage. Not just the down payment (which is typically higher for second mortgages) but also ensuring your monthly finances are up to scratch and you are aware of the financial obligations that come with a second mortgage. Mortgage calculators are a handy tool that can give you an idea of affordability from the outset.
Depending on what your goals are and how you plan to use the property, you may also need to consider the interest rates, homeowners association fees, property taxes, and general housekeeping and maintenance costs when making your decision. For example, if you are purchasing a second home for rental purposes, you may need to consider the additional costs that come with the responsibility of being a landlord. Mortgage lenders usually require you to be able to cover the full cost without a tenant present, to prepare for all possible scenarios.
Once you are clear on what the second mortgage is for and you are happy with your affordability, the next step is to apply for the second mortgage.
Second mortgage loan process
Eligibility and pre-approval
The first and most important step is to partner with a reliable mortgage lender, who will help you get the financial process started, find the right product for you, and obtain a pre-approval certificate. If you are looking for a new home, ideally this will be the first thing you do. Applying for your first second mortgage can be a complex process, so ensuring that you have your finances in order from the outset can help mitigate any financial obstacles that may arise. The last thing you want is to start the process and later learn there is an issue with the second mortgage application!
- mitigation of financial obstacles
- smooth purchasing and closing experience
- you know what you are working with
To gain pre-approval, you will need to contact your mortgage lender who will assess your:
- personal information (address history, employment)
- financial information (current income, dependents, assets such as investments, properties, savings, pensions, and debt)
- mortgage type (for example, fixed or adjustable)
This typically involves running through a credit check to provide you with an idea of how much you are eligible to borrow and further details of the loans available to you, including a mortgage illustration.
Pre-approval means you have the green light for your mortgage application and if you are looking to purchase a property, this is where you can start the house-hunting process.
Once you have found your perfect property and an offer has been accepted, your mortgage lender will typically arrange for a home appraisal to ensure the property is valued the same as or higher than the money borrowed. This also ensures the property is a valuable investment for you and there are no large financial surprises.
If you are applying for a second mortgage on your primary property, an appraisal is still required.
The final application
A satisfactory appraisal is a prerequisite for the final application. If your mortgage lender is happy, the loan application can move forward. This usually entails gathering any more information ready to submit to the underwriters, who will assess the application for approval. This is usually piecing together the information obtained in the pre-approval stage with information of the property you are purchasing (address, appraisal, results of checks and surveys from the lawyers, etc.) In some cases, the underwriters may request additional information to assess the application. Once this has been completed, your mortgage lender will contact you to discuss the mortgage loan in more detail, including the binding offer, key information, and any cooling-off periods.
Releasing your mortgage funds
Once the second mortgage has been approved and signed off, the loan funds will be released accordingly, directly to the seller with the remaining balance (minus the deposit that is paid at an earlier date) along with any relevant taxes and fees legally required.
Depending on the type of second mortgage you applied for, there may come a time when you are required to (or choose to) review the product again. If you are working with a mortgage lender, they will be able to advise on the necessary steps you need to take. For more help, contact the Tammi Lindley Team who are on hand to answer any questions on the second mortgage process and help you find the best product to suit your needs.
If you’d like to start the process of getting a home, come see us at the Tammi Lindley Team. We are Portland’s premier mortgage lenders, offering hundreds of mortgage products so you can pick the mortgage that matches your needs. Contact us today and start the process of owning your dream home.