There are many factors involved with getting approved for a second mortgage loan including being at the same residence for many years, being at the same job for many years, as well has having low debt to income ratio, high liquid reserves or significant residual income and a high credit score. Your earnings are also considered.
While your earnings, long-term job stability, length of time at your residence and liquid assets are strong points, the strongest are a high credit score and low loan to value (LTV) – up to 65% – on your home. With these, a conforming second mortgage loan can pass an automated underwriting system and be approved without any other documentation (besides the appraisal, FICO credit scores and credit reports). Although, huge liquid reserves could also help get some lenders to waive some underwriting guidelines.
A credit score of over 620 can get you a decent interest rate, but the rates are more prime with scores over 680 and better still with scores over 700. Scores over 740 basically put you in the driver's seat. So, a good credit score allows the lender to offer a higher loan amount and better interest rates.
Second mortgages are home equity loans offered as home equity installment loans (HEILs) or home equity lines of credit (HELOCs). With a second mortgage loan, you can get 100% financing on a purchase loan – called a "piggyback" loan. There is no private mortgage insurance (PMI) with 2nd mortgages. Although PMI is temporary, it may cost more than the interest you pay on a piggyback loan.
For people who are already homeowners, second mortgages are sometimes used to finance the down payment of a second home or investment property, as well as for home improvements or other expenses. According to Michael D. Larson, Bankrate, when the prime rate is below the average rate charged on 30-year fixed mortgages, consumers looking to tap their home equity may find it cheaper for them to get equity loans or lines of credit. Besides costing thousands of dollars less in closing costs, the rates on these loans may be lower than first mortgages.
Later on, you can refinance both loans into a single mortgage when your home value goes up. Or, you could just refinance the 2nd mortgage to a lower rate when your home value increases.