A Loan Subordinate to Another Loan
on the Same Property
A second mortgage typically refers to a secured loan (or mortgage) that is subordinate to another loan against the same property.
In real estate, a property can have multiple loans or liens against it. The loan which is registered with county or city registry first is called the first mortgage or first position trust deed. The lien registered second is called the second mortgage. A property can have a third or even fourth mortgage, but those are rarer.
Second mortgages are called subordinate because, if the loan goes into default, the first mortgage gets paid off first before the second mortgage. Thus, second mortgages are riskier for lenders and generally come with a higher interest rate than first mortgages.
In most cases, a second mortgage takes the form of a home equity loan and the two are synonymous, from a financial standpoint. The difference in terminology is that a mortgage traditionally refers to the legal lien instrument, rather than the debt itself.
The term length of a second mortgage varies. Terms can last up to 30 years on second mortgages; however repayment may be required in as little as one year depending on the loan structure.
A second mortgage can occasionally be the catalyst to foreclosure when a homeowner defaults on their loan. The second lien holder then purchases the primary mortgage (which may still be in good standing) and then forecloses which leaves the homeowner losing their home to the 2nd mortgage lender.
Generally, when considering the application for a second mortgage, lenders will look for the following:
- Significant equity in the first mortgage
- Low debt-to-income ratio
- High credit score
- Solid employment history
Real Estate Financing Books