Having bad credit can make it extremely hard to get any type of loan. This is especially true from mortgage loans. Let’s face it, the options for bad credit home loans have dwindled considerably in the recent years.
If you already own a home and have equity in it, you may be able to get a 2nd mortgage loan. Often called a home equity loan, this loan is collateralized by the equity that you have in your home. Your credit does not have to be nearly as good as it would for a purchase money mortgage, but it will still need to be fairly decent.
You credit score is the metric that lenders use to determine how much risk you are to them. They then offset this risk by larger monthly payments and higher interest. This is why someone with a better credit score than you is going to get a lower interest rate – in the lender’s viewpoint they represent less risk. Because lender’s believe that people with bad credit already are much more likely to go into default, they charge a higher interest rate to make their perceived risk seem worthwhile.
Taking your credit score into consideration, the primary reason that a lender would be willing to give you a second mortgage when you have bad credit is because it is a secured loan. This means that if you default, they can foreclose on the property. Additionally, if you file for Chapter 7 bankruptcy protection, chances are that they will not be left out in the cold – as long as your equity position is sufficient.
However, it is important to note that lenders are not nearly as secure as the first mortgage holder. In a Chapter 13 bankruptcy, precedence is given to the first mortgage and a second mortgage is treated as an unsecured debt. This means that it is given very low priority and they may not receive much of what you owe them. Generally speaking, if a lender feels that you may eventually file for bankruptcy protection, they will not grant you a mortgage.
While it is possible to get a second mortgage with bad credit, you will need to have significant equity in the property to do so. Having a stable job and good income will also help you get a loan approval.
Of course, one important thing to remember is that when you take out a second mortgage, you are putting your home at risk. You should carefully consider if this is the right option for you before you make this decision.