Depending on your financial position and investment strategy, there may be a situation when you want to purchase a second home or property. If that’s the case, you may be in interested in having 2 mortgages.
For instance, you might want it for another family member to live in or you may like to rent out the second home to supplement your recurring income.
In principle, you are allowed to have as many mortgages as you want at any given time. In fact, many people take out a second or even a third mortgage. Realistically, the decision lies with your lender who factors in your ability to afford repayments.
Factors you need to consider when taking out 2 mortgages at once:
Debt to Income Ratio
Lenders base their risk decision on your debt to income ratio. You should be able to qualify for 2 mortgages based on the standard debt to income requirements.
Many lenders recognize debt as having a bigger impact than credit score when it comes to qualifying for a mortgage. Debt to income ratio can become more difficult when you are planning on buying a property while selling the primary residence.
As per statistics, lenders want to work with borrowers who want to have 2 mortgages when their total monthly debts are equal to or less than 43% of their gross monthly income. This includes current and estimated future mortgage payments.
If you are planning on making an offer on a new home without adding a contingency, while already paying an existing mortgage, then you must earn enough income each month to ensure that your 2 mortgages will not push you past the 43% barrier.
Even if you are planning on selling your current home, you will not be able to offer any guarantee to the lender as to when you will close a sale. It can be some months before you can stop making 2 mortgages payments. A lender will not approve you for the loan, if they think that you cannot afford making payments on 2 mortgages for any number of months.
If you are wondering how many mortgages can I have, there is relief for those homeowners who need to make an offer on their new residence, but have found a potential buyer for their home even if the sale has not been closed.
You may not have to factor in your current monthly mortgage payment while qualifying for a new mortgage, if you have a ratified contract for the sale of your current home. Lenders find it easier to accept that you will be unloading your current residence before you begin making mortgage payments on your new home.
Equity of the Two Mortgages
If you want 2 mortgages on a single property, then the most important aspect to consider is equity. This can be better explained as the aggregate balance of your mortgages as compared to the value of your property.
FHA loans will let you go to 97% value on a single mortgage, whereas, others might allow only 80% on junior mortgages. There are certain lenders that may allow up to 95% loan to value (LTV) on a single mortgage. This means you can borrow up to 95% of the total value of your property.
However, this is only for the first mortgage. If you are asking, “Can I have 2 mortgages,” in this scenario, the second mortgage will factor in what you owe on the first mortgage and the value of the property, while calculating the amount you can borrow in keeping terms with the LTV.
For instance, if your property is worth $500,000, and you take out a mortgage of $250,000 then you have used 50% LTV on the first mortgage. The second mortgage allows up to 80% LTV. This means you should ideally be able to borrow $400,000 which is 80% of $500,000.
But you will have to deduct $250,000 from the first mortgage, which leaves you with only $150,000. Hence, you will be able to borrow $150,000 or less in additional mortgages!
Lenders that allow multiple mortgages
Another important consideration to be able to obtain 2 mortgages is whether you are doing business with the same lender or multiple lenders. You need to factor in your business relationship with the lender as well.
This is a major advantage of staying exclusively with one lender. You can make the lending process easier if you build upon your existing relationship.
On the other hand, this will cause you to miss the opportunity to seize lower rates and other special terms with other lenders who want to acquire your business. You should weigh all your options, ultimately, and choose a lender that gives you the best value for your dollar. This is an important consideration from a cost standpoint.
Loan Timing of each loan
It might be hard to qualify for 2 mortgages at the same time if you have never owned a home before. Lenders are more comfortable when you have a solid track record for real estate.
It might be wise to complete the loan application and underwriting on your primary residence first and then allow some time to for it to reflect favorably on your credit report.
Many people, illegally, buy properties on residential mortgages for the purpose of letting them out. Most buy to lets require a 20% – 25% deposit whereas residential purchases can be completed with 10%. Some buyers who do not want to prove their income to take out a mortgage on a property they intend to live in.
If you are in a hurry, then you might want to consider having a co-signer with a long real estate history. Lenders prefer and give more favorable terms to owner occupied properties. It is important that you acquire a property with the right intent.
Managing 2 Mortgages
You must manage multiple mortgages properly once you have obtained them. It can become very confusing to keep track of your payment due dates and outstanding principal balances.
You need to determine whether you are comfortable making payments on both mortgages at the same time, or you would like to spread them out over the month. Spreading out payments over the month makes more sense if your paycheck comes after every two weeks.
You can request your lender to modify your payment dates to suit your needs if you are dealing with just one lender. Your business relationship will help you on this account.
It is vital that you never miss out on your mortgage payments. A payment default can affect your credit history and make it difficult to acquire future mortgage loans.