9 Tips on Applying for a Second Mortgage

People often apply for a second mortgage or home equity loan to consolidate debt, cover large expenses, or fund home remodeling and improvements. Second mortgages are typically classified as fixed interest rate home equity installment loans (HELOANS) and adjustable mortgage rate home equity lines of credit (HELOCs). Your choice depends on your specific needs, but the application and approval processes are similar for both. Here are nine tips to ensure your loan process goes smoothly:

1. Compare Options: Evaluate alternatives such as mortgage refinancing and other loan options to determine if a second mortgage is the best choice for your situation.

2. Clarify the Loan Purpose: Be prepared to explain to the lender the purpose of the loan. Your answer will influence their decision on whether to approve your application.

3. Check Your Credit Report: Review your credit report for errors and obtain your FICO scores from myfico.com/12. Lenders will assess your FICO score to determine your loan rates. For tips on improving your credit score, refer to "How to Improve Your Credit Score."

4. Compare Loan Options: Discuss various home equity loan programs with your broker or lender to find the best loan for your circumstances. Securing a good interest rate is also crucial.

5. Prepare Necessary Documentation: Your lender will provide a mortgage checklist, which includes the paperwork needed to close the loan, such as:

   • Copy of the deed to the property.

   • Recent tax appraisal.

   • Last two years' W-2s, tax returns, and current pay stubs, or two years' tax returns if self-employed, including all schedules.

   • Proof of income from alimony, child support, disability payments, lawsuit settlements, inheritance, or other sources.

   • Copies of your last 3-6 bank statements.

   • List of all open credit accounts (account numbers, payment amounts, and balances).

   • Current mortgage statement.

   • Homeowners insurance information (name, account number, and phone number of the agent).

6. Expedite the Process: Faxing the required documentation from the checklist will speed up the loan process more than mailing it.

7. Complete the Application Thoroughly: Ensure that your loan application is filled out completely to avoid delays in approval and loan closing.

8. Avoid Bad Loans: The Federal Trade Commission (FTC) warns against lenders who encourage you to falsify your application, urge you to borrow more than you need, push you into unrealistic payment terms, present a different loan product at closing, ask you to sign blank forms, or deny you copies of documents you signed.

9. Understand Rejection Reasons: If your mortgage application is rejected, ask why. Understanding the reasons can help you take corrective actions to secure loan approval in the future. Sometimes, paying down credit card balances can improve your credit score enough to qualify.

By following these tips, you can navigate the second mortgage or home equity loan process more effectively and increase your chances of securing the best loan for your needs.