How to qualify with second mortgage lenders with bad credit? More than 1.9 million Canadians take out second mortgages to finance their homes. They’re handy for some extra funding for renovations to your home.
But getting a second mortgage isn’t as easy as the statistics suggest. This is because of how your credit score affects your chances for approval.
So what are the benefits of getting a second mortgage? How do you find the right second mortgage lenders?
That’s what we’ll be looking at today. Read on to find out about how to obtain a second mortgage with bad credit.
What is a Second Mortgage?
A second mortgage is when you get a second home loan using the equity in your home. In other words, your house is used as collateral for another mortgage.
You can borrow up to 80% of the appraised value of the house minus the balance on your first mortgage.
It’s important to note that this loan is secured against your home equity. You’ll have to pay off your initial mortgage along with the second one.
Failing to make payments and defaulting on your loans means you might lose your home. Your home will likely be sold to pay off the loans. The first lender will get the funds first.
Because second mortgages are inherently riskier for lenders, the rates are different. They’re typically higher than on first mortgages. You’ll also have to pay different fees as well, such as:
- Title search
- Legal fees
- Title insurance
- Appraisal fees
Types of Second Mortgages
Second mortgages come in a few different forms. One is through a lump sum.
This is the standard second mortgage type that’s a one-time lump sum loan. Borrowers can use it for whatever they see fit.
Lump-sum loans are paid back with monthly plans over a period of time. You’ll pay part of the interest rates as well as the principal loan.
The other type of the second mortgage is with a line of credit. This is a pool of money that you can draw from. You’re never required to take any money, but you have the chance to do so at any time.
The lender gives you a maximum amount and you can take out as much until you reach the limit. Similar to a credit card, you pay the lender and borrow as many times as you need.
Benefits of Getting a Second Mortgage
One of the biggest benefits of getting a second mortgage is the amount you can borrow at one time.
This is because your home helps secure the loan, and most homes are worth a good amount of money. When using your home as collateral, you have a much bigger borrowing amount.
Remember that in Canada you can borrow up to 80% of your home value. This could be a substantial amount depending on the house.
Homeowners might also be able to take out mortgage interest rate tax deductions. This is variable from person to person, but a benefit nevertheless.
How Credit Score Affects Second Mortgage Applications
With all that said, getting a second mortgage is harder for those with bad credit.
This shouldn’t come as a surprise. Lenders aren’t willing to take on more risk by lending to someone with poor credit history. On top of that, you’re taking on extra debt on top of your initial mortgage.
If you don’t have a stellar credit history, lenders will need some convincing before they approve you for a second mortgage. In many cases, they won’t give it out at all.
The baseline for a second mortgage is a credit score of about 680. This results in failed applications or incredibly high interest rates.
However, there are ways you can secure loans even with a lower score.
How to Consolidate and Get Approved With Second Mortgage Lenders
Just because your credit score isn’t ideal, doesn’t mean you can’t be approved for a second mortgage forever. Here are steps you can take to secure a second mortgage in Canada:
Improve Credit Score
The most effective way to secure a second mortgage is by improving your credit score. While this may not be viable for people who need loans now, it’s still an option for homeowners looking to the future.
If you’ve been rejected from banks for having a poor credit score, it’s never too late to improve it.
You can do so by:
- Paying your bills on time
- Staying under your credit limit
- Keeping your oldest accounts for reference
- Abstain from applying for new credit
Engaging in those strategies will help boost your credit score, which in turn will improve your odds of approval down the line.
Larger Down Payment
Credit scores are important, but they aren’t the end-all-be-all when it comes to second mortgages.
Lenders also look at things like your income and down payments. Some lenders might approve you if you put down a larger down payment.
The minimum down payment is usually in the 15% to 20% range, but putting down an even bigger one might benefit you.
It decreases your monthly payments, but it also shows that you’re financially stable to pay off your debts. In some cases, it exempts you from paying mortgage default insurance.
Find Bad Credit Second Mortgage Lenders
If you’ve been turned down by banks and other institutions, you aren’t out of options.
Bad credit lenders are all over Canada, and it’s only a matter of finding the right one. These lenders are willing to take on whatever risk you carry.
TWhile there may be more fees involved, they’re reliable and quick ways to secure a second mortgage.
Leverage Second Mortgages Today
Poor credit isn’t the end of the world when it comes to second mortgages. Use this guide to find second mortgage lenders and explore different options today.
Looking for reliable second mortgage lenders in Canada? Contact us today and we’ll get you started on a solution right away!