Should I Offer Second Mortgages? The Advantages and Risks.
You don’t hear of many private lenders who offer second mortgages, but Jcap is an exception. Bob Eakin, the CEO of the company, has been offering second mortgages since the 90’s and hasn’t looked back.
“Seconds can be risky,” says Eakin. “CLTV is the key! Even if a borrower can find a lender to do a second, they are very difficult to qualify for…”
Although it is a riskier option, there is a high demand for seconds. There is a need for credit-worthy people to access their equity, but the new bank regulations have made it virtually impossible for borrowers.
Unlike credit cards and personal bank loans, second mortgages are usually larger because they are based off of a home’s equity.
Some of the most common uses of a second mortgage are:
Avoiding private mortgage insurance (PMI)
Paying for college tuition
Investing in other properties
As a mortgage broker, second mortgages are considered safer because they are backed by the security of a home. Second mortgages are beneficial for the buyers because they typically have lower interest rates than other loans or credit cards. Tax benefits are also a huge plus for borrowers due to the fact that second mortgages can be tax deductible (consult with your CPA).
Most lenders steer away from seconds because of the added risk of being behind a first. If the first TD forecloses, the second loses its entire balance – Ouch! If you are going to offer seconds, you must manage the risk. First, watch your CLTV. There is no better protection than equity in the property. At Jcap, we want our borrowers making the payment and if they hit a rough spot, we want them thinking sell, not quit.
Next, manage the default process – file quick and watch the first. If the property is going to foreclose, beat the first to the courthouse. If the risk is managed, seconds create a great income stream for the lender and provide a great service to the borrowing community.