You know the old wisdom – if you’ve got bad credit, then GOOD LUCK with trying to get a mortgage!
Most of the time you’ll likely get declined. The rest of the time, you’d be charged an arm and a leg in interest just to compensate the lender for the risk they’re taking.
How much harder it is to get a second mortgage!
What’s a second mortgage you, might ask?
Basically, it’s a supplementary mortgage that you can take on. All this while your original mortgage is in effect.
In the event that your property gets liquidated, the proceeds will be used to pay the first mortgage, with the residual proceeds going to the second mortgage.
From a second mortgage lender’s point of view: yikes! Now it’s easy to see why it would be even harder to get a second mortgage with bad credit.
Why would you need a second mortgage?
Generally, a second mortgage is taken on by people who cannot afford to finance some big ticket item. These are usually not property related – they could relate to your kid’s college tuition fees, a new car etc.
Again, I reiterate: with virtually no collateral/security in place, it’s no wonder that second mortgages are so notoriously difficult to get.
How do you succeed in getting a second mortgage?
Thankfully, second mortgages aren’t impossible to get, even if you have bad credit! The trick here is perseverance.
Be prepared to jump through a few more hoops than you did with your first mortgage, and definitely expect it to be an uphill climb (compared to someone with good credit.)
Here are just some things that might tip the scales in your favor:
1. Help from the economic downturn
It’s crazy to still be talking about the economic downturn since it happened almost a decade ago! Thankfully (you’ll see why in a bit), it was such a devastating crisis that its effects are still being felt today.
More and more people have defaulted or been late on their loan payments. Additionally, people continue to be affected by job loss or illness. As such, a large portion of a bank’s loan portfolio is made up of people with lower and lower credit scores.
Banks have become attuned to the fact that their clients will have lower credit scores. As such, they don’t turn down people with bad credit as frequently as before. This lowers the barrier of entry for people who may have once faced financial difficulty, but have since turned their life around.
2. Adequate preparation is key
Planning and preparation is essential in any venture. When applying for a second mortgage, there is no difference.
What does preparation entail here? Usually it means you should be keeping up to date with the monthly payments on your first mortgage. If you’re approaching your current lender for the second mortgage, then this becomes ever more important!
As a side note, I’d advise that you talk to your primary lender first!
Well, they’d already have your financial information on file, like the value of your property and your payment history. If you have bad credit, then a good relationship and history with the lender can help a ton with getting your second mortgage approved!
3. Show them what you’ve got
Sometimes, a good history alone is not good enough. Lenders are much more interested in your future ability to pay, rather than your past.
What does this mean?
It means that you have to show them that you will not be in financial distress/difficulty if you were to take on the second mortgage. Lenders are well aware that having two mortgages to pay can stifle and strangle your cash flow. Thus, they’d be worried about your repayment ability.
That’s why it’s essential to show them that you have good job security. You can usually present to them a year’s worth of salary stubs. You might have assets that they hadn’t known about previously. Bring those up as well.
All these things don’t show up on your credit report, but they can vastly improve your chances of getting a loan. So don’t be shy about letting these little golden nuggets see the light!
4. Explain yourself
If a lender is still unconvinced about your newfound payment ability, then you’ll need to defend your case!
Provide a good, solid reason why you missed, or were late on your payments in the past (which led to your bad credit score.)
If you can prove that you’ve made a clean break from the past, a lender would be much more comfortable in extending you a loan.
5. Be the teachers pet
Yuck, I know. But showing a lender that you’ve done your homework beforehand can put you in their good books. Homework usually means that you are completely aware of all the fees and interest that will be incurred. Show them a budget that tracks your income and expenditure.
This will put your lender’s mind to rest, because they know that you’ve thought long and hard about what you’re getting into. They’ll also know that you’ve made necessary plans for being on time with your payments.
If you’re like the most of us, you might have found a few dings on your credit report due to the economic downturn. It sucks to know that your bad credit items take 7 whole years to fall off. Just be comforted that you’re not alone.
There are many people in a similar situation to you, and yet they are able to get their second mortgages approved! As I said before, the trick is perseverance and knowing how to ‘play the game’. That is, getting your ducks lined up before you even start talking to your lender.
I wish you all the best in your search!
Let me know in the comments – have you been successful with a second mortgage? Do you have any tips on how to get your loan approved?