How does Getting a Second Mortgage with Bad Credit work?

Getting a second mortgage with bad credit can be quite difficult. Even though you have the equity needed to be eligible for the loan, lenders may reject your application if your credit score is too low. Fortunately, there are some ways that you can be approved for a second mortgage even with bad credit, and we discuss that in this blog post. What you should know is that if you secure your second mortgage loan, it can improve your credit ratings. Not to mention, you can clear off all debts and dues with the mortgage funds your get, including your primary mortgage. Now, without any further adieus, let’s dive into how you can be approved for a second mortgage even if you have a bad credit score.

Consider looking for an alternative lender

Although getting approved for a second mortgage with a low credit score may look daunting, it’s not as challenging as you may think it is. If you want to apply through a traditional financial institution such as banks and credit unions, there is a high chance of your application getting rejected. This is due to their strict mortgage lending criteria, where keeping a high credit score is a must. However, the good news is that with private lenders, this is not the case. They have fewer restrictions, and the primary factor they check for is if you can repay the loan within the given period, that’s all. If you are willing to putting in some extra equity that you can surrender as collateral, then you will be eligible for low-interest rates as well on your second mortgage.

Keep your credit score at a minimum of 680

Even though your credit score does not play a major role when you are applying for a second mortgage with a private lender, it’s better that you keep it at a minimum of 680. Why so? Well, some lenders may reject your mortgage application if your credit score is less than 680. Even if you do secure your funds, you may be charged higher interest rates and sign a contract with stricter terms. It’s advisable to build your credit score first to at least 680 before applying for this loan.

Lines of credits, personal loans and fine prints

You can get a second mortgage with a bad credit score through lines of credit or personal loans; these are the go-to plans nowadays for anyone who has a poor score but requires some emergency cash. One of the advantages that you get is that the loan is always short term and you can clear it off within a couple of years. Still, you should always pay your repayments on time; else it can negatively affect your credit score. Read the fine print on your contract as well and if you don’t like any clause, get it amended. Lastly, consider putting some cash into your second mortgage with bad credit. Do this to be safe if, in any case, you are not able to pay back your loan on time.

2 years of verifiable income

As second mortgages come to a greater risk for the lender compared to a primary mortgage, they can ask you to submit proof of a stable income at least for two years. So, it’s a good idea to keep your income tax documents, payslips and job appointment letter with the joining date near at hand; you may have to submit them. If you are self-employed, you must show that you have had a steady stream of income flowing in for the last two years.

Focus on your home equity

Rather than getting hung on your credit score, you should concentrate more on calculating your home equity. You can use an online home equity calculator to get an estimation of how much equity you will need to be approved for a second mortgage. You won’t need to put all the equity as collateral; that can be dangerous. However, just enough for the loan to be approved at a low-interest rate. If you have the equity, deciding to lend you money becomes easier for a lender as there is less risk involved.

How a second mortgage with a bad credit score can help you?

Once you understand the risks of a  second mortgage with bad credit– weigh them against the benefits. You can avoid bankruptcy and start saving by reducing the high-interest debts you have to a much lower interest rate. Some benefits of  a second mortgage include:

• Clear your debts using consolidation: Even with a slightly higher rate, your second mortgage will be more affordable than most of your high-interest credit card debts. You can consolidate it all in one place and pay it off faster.
• Prevent a foreclosure: Your second mortgage can allow you to secure enough funds to pay off existing mortgage arrears and prevent foreclosure.
• Pay off Revenue Canada: You can use the funds to settle your income tax or director liability with the government.
• Property Tax Arrears: Second mortgages can be used to pay out and catch up on overdue property taxes as well.

Consider what you can accomplish with the type of loan, and then decide if it feels right for you. When you’re consistently short on cash flow and up against a deadline, it would be comforting to know that you can still get a second mortgage with a bad credit score. Let a second mortgage be the first step toward improving your finances.