It is much harder to obtain a 2nd mortgage than it ever has been before. (Unnamed Copywriting)

It is much harder to obtain a 2nd mortgage than it ever has been before.

2nd mortgages and Home Equity Lines of Credit used to be very popular mortgage finance tools. Every major bank offered them and for a long time would tack one on after every first mortgage that they wrote. 2nd mortgage loans were used as a tool to pay for down payments, allowing people to get into new homes with no money down. HELOCs were added on to new purchases to instantly utilize the equity.

2nd mortgages were absolutely everywhere. There were so many different lenders competing with each other that the 2nd mortgage rates continued to get lower and lower. It even got to the point that homeowners had the real option of getting a 2nd mortgage refinance loan to pay off the first mortgage, and it usually made a lot of sense. In a lot of instances, a 2nd mortgage rate would even be lower than 1%.

There were second mortgages available for almost every borrower as well. A bad credit 2nd mortgage was no harder to obtain than the actual financing on a first mortgage. It was hard for a mortgage loan officer to look at anyone’s situation and not find a way to better it by utilizing a 2nd mortgage loan.

There were some serious consequences that came along with this increase in lending on 2nd mortgages, though. As the economy started to crash, more and more homeowners started to face the onslaught of foreclosure, and no one was hit harder by this than 2nd mortgage and Home Equity lenders.

A mortgage is a conveyance of a lien, meaning it is just something that attaches to a home to guarantee that the lien holder gets paid from the proceeds of a home sale or refinance before anyone else. These liens have a pecking order, in terms of priority. The first holder will get their money prior to any other lien holder or the homeowner getting any. 2nd mortgages are called 2nd mortgages, not because they are not the borrower’s first mortgage that they’ve gotten, but because they hold 2nd lien position, meaning they can’t get paid until the first lien holder does.

There were two major effects of the housing crisis. Home values greatly decreased across the nation, and foreclosure rates greatly increased. The first was caused in part by the second. When a home goes to foreclosure, it will typically sell at auction for about 80% of its value. When there are enough of these foreclosures on the market, it no longer makes any sense for a new buyer to buy a home at full cost when they can get one in just as good of condition for 20% less. So, as the foreclosures increased, the first to feel it were the 2nd mortgage companies. If there wasn’t enough money to pay off first and second mortgages, the money went to the first mortgage every time. As a result, almost all of the 2nd mortgage lenders have gone out of business.

There are still 2nd mortgage loans available. But, it is not like it was before. Lenders are more reluctant to lend in the higher range of a home’s value, and they are much more hesitant to loan to anyone with less than stellar credit. They are still there, but a homeowner will have to look much harder to find a good 2nd mortgage loan.