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On conventional loans a 2nd Mortgage is a second lien on a property. Called lien holders positioning the 2nd mortgage falls behind the 1st mortgage. When refinancing if the homeowner wants to refinance the 1st mortgage and keep the 2nd mortgage, the homeowner has to request a subordination from the 2nd lender to let the new 1st lender step into the first lien holder position.
A 2nd mortgage can be structured as a fixed amount to be paid off in a specific time, called home equity term. They can also be structured like a credit card giving the borrower the option to make a payment less than the interest charged each month.
2nd mortgages are riskier for lenders and thus generally come with a higher interest rate than first mortgages. This is due if the loan goes into default, the first mortgage gets paid off first before the second mortgage. Commercial loans can have multiple loans as long as the equity supports it. Due to lender guidelines, it is rare for conventional loans for a property having a 3rd or 4th mortgage.
In the terms of foreclosure, a second lien holder can start the foreclose process when a homeowner stops making payments. The second lien holder has to satisfy the 1st mortgage balance before they could collect on the 2nd mortgage balance.
In situations when a property is lost to foreclosure and there is little or no equity. The first lien holder has the option to request a settlement for less with the second lien holder to release the 2nd mortgage from the title. Once the second lien holder releases themselves from the title, they can come after the homeowner in civil court to pursue a judgement. At this point the only option available to the home owner is to accept the judgment or file bankruptcy.
Generally, when considering the application for a second mortgage, lenders will look for the following:
- Significant equity in the first mortgage
- Low debt-to-income ratio
- High credit score
- Solid employment history