Whether you want to expand your real estate investment portfolio or expand your personal vacation home count beyond your primary residence, you might wonder how many mortgages you can take on.
Buying multiple properties can be a great way to increase your assets and make money, particularly if you make excellent decisions along the way. However, you may want to carefully consider your ability to juggle multiple mortgages and assess your experience level before you take the plunge.
Having two mortgages on a single property may seem unusual, but it is possible in certain circumstances. This article will explain when and why a property owner might take out a second mortgage, the types of second mortgages available, and the pros and cons of having two mortgages.
What Are First and Second Mortgages?
When you purchase a home you likely need to take out a mortgage loan to cover the cost beyond your down payment. This first loan that you get when buying the property is known as the first mortgage. It has the first priority position for repayment if you were to default.
A second mortgage is any additional loan taken out after closing on the first mortgage, It has lower priority than the first mortgage
When Can You Get a Second Mortgage?
There are two main scenarios when a homeowner can take out a second mortgage:
- At the time of purchase as part of the financing
- After purchasing the home by tapping available equity
During the home buying process, some buyers utilize a piggyback second mortgage to make up part of the down payment amount. Others may take out a second mortgage later on if they have built up equity in the home
Here are more details on how second mortgages work in each case:
Piggyback Mortgage
Piggyback mortgages allow the homebuyer to avoid paying private mortgage insurance (PMI) which is required when a down payment is less than 20% of the purchase price.
With a piggyback mortgage, the buyer puts down 10-15% and takes out two mortgages:
- First mortgage for 70-80% of purchase price
- Second mortgage for 10-15% of purchase price
Together the two loans cover 90-95% of the total purchase price without requiring PMI.
Home Equity Loan or Line of Credit
After owning your home for several years and making mortgage payments, you build equity. This is the portion of the home’s value that you fully own.
A home equity loan or home equity line of credit (HELOC) allows you to borrow against the equity you’ve built up while keeping your original mortgage intact.
The amount you can borrow is limited to 85% of the home’s total value minus what you still owe on the first mortgage.
The Pros and Cons of Two Mortgages
Second mortgages can be useful tools in certain situations if used strategically. However, they also come with some potential disadvantages to consider.
Pros
- Avoid PMI with piggyback mortgage
- Access cash from equity without refinancing first mortgage
- May get better rates than other financing options like personal loans or credit cards
Cons
- Higher interest rates than first mortgage
- Additional monthly payment
- Second mortgages typically have variable rates
- More fees and closing costs
- Increased debt obligations make it harder to qualify for future financing
Tips for Getting a Second Mortgage
If you decide a second mortgage makes sense for your situation, here are some tips to follow:
- Check your credit score and report for any issues before applying
- Shop around with multiple lenders to compare rates and fees
- Understand the terms and conditions fully before signing
- Be conservative when estimating your available home equity
- Have a plan for managing the additional monthly payment
- Try to pay down second mortgages quickly since they usually have higher rates
The Bottom Line
While not very common, it is possible for a homeowner to have two separate mortgages on the same property under certain conditions. This route involves more risk and cost than a single mortgage, but can also provide benefits in specific home buying or tapping home equity situations. Understanding exactly how second mortgages work is key to determining if one makes sense for your financial situation.
How many home loans can you have?
For second homes and investment properties, you can have up to 10 home loans. The Federal National Mortgage Association (FNMA), or Fannie Mae, sets the limits for the number of mortgages you can have based on the type of home loan you use. For primary residences, there isn’t a limit on conventional mortgages. For primary residences with a HomeReady® loan, however, the limit is 2.
It’s important to note that although there is no limit on the number of conventional loans you can have on your primary residence, you can typically only own one primary residence at a time. It is common to take out a second mortgage in the form of a home equity loan, but people usually do not take out more than two home loans on the same primary residence at the same time.
Therefore, the fact that there is no limit for primary residences does not tend to result in numerous mortgages being taken out under this rule.
Qualifying for 1 – 6 mortgages
If you want to qualify for financing on up to 6 mortgages, Fannie Mae requires a credit score of 620 or higher. Fannie Mae also sets cash reserve requirements depending on the number of properties that you have
- For 1 – 4 second homes or investment properties: This requires 2% of the unpaid principal balance (UPB) plus 2 months of mortgage payments, including principal, interest, taxes, insurance and association fees (PITIA).
- For 5 – 6 second homes or investment properties: This requires 4% of the UPB plus 6 months PITIA.
Your lender may also ask you to meet certain requirements that include:
- A credit score in the 620 – 680 range
- A loan-to-value ratio (LTV) up to 85%
- Cash flow availability from current rental properties
- Proof of income from W-2s or tax returns
- A statement of assets and liabilities
- Financial statements on any existing investment properties
- Proof of existing conventional mortgages
Can You Have Two Separate Mortgages On One Property? – CountyOffice.org
FAQ
Is a piggyback mortgage a good idea?
Pros and cons of piggyback loans
You can avoid paying mortgage insurance. You’ll pay a higher interest rate on the second mortgage. You can buy a higher-priced home without taking out a jumbo loan. It can be harder to refinance or sell your home with two loans.
What is the 3 7 3 rule in mortgage?
How much do I need to put down on a second mortgage?
However, the required down payment for a second home is around 10%, and sometimes more than 20%. The amount you’ll need for a down payment on a second home depends on several factors, including your credit score, your debt-to-income (DTI) ratio and the cost and type of property you’re purchasing.
What is the 2 2 2 rule for mortgages?
For income verification, lenders typically require 2 years of W-2s, 2 years of federal and state tax returns, and your 2 most recent pay stubs. This documentation showcases your financial stability and readiness for homeownership!