What Do I Need to Qualify for a Second Mortgage in Canada?

A second mortgage is a loan that homeowners may take out against the equity of their home, using their home as collateral. While this is not a wise move to make if you’re trying to simply cover daily living or luxury expenses, there are some occasions where taking out a second mortgage on your property can be quite practical. Examples of such situations include:

  • When you are attempting to make a large investment that could improve your financial situation, such as higher education or home renovations if you intend to sell the home for a profit
  • When you need to consolidate other unsecured debts
  • To avoid having to obtain private mortgage insurance (or PMI)

If you fall into any of these categories, a second mortgage could be a smart move. You won’t know if you qualify for a second mortgage, which is a loan that comes with interest, until you speak with your lender about your options.

How Do I Qualify?

Lenders like to see very specific things on an application for a second mortgage. This is because second mortgage loans are risky in nature. This explains the necessity of using the house as collateral, as well as the higher interest rates associated with second mortgages. Lenders will look into the following criteria before deciding to accept or reject your application.

Equity

Lenders want to know how much of your home’s equity is available to you. They may also want to make sure that you have enough money in your savings or other accounts to pay for several months of both mortgage payments. This helps to protect their investment, as they know that you’ll have the means to pay both loans for some time.

Credit Score

Your credit score is one of the most important numbers you will deal with in many financial transactions. Lenders of any nature will consider your credit score before approving any type of loan, especially a second mortgage. Most notably, your credit report will be looked into before an answer is given as well. This report details late payments that you have made toward your other debts, which your lender will absolutely look further into.

D-T-I

Your debt-to-income ratio is the difference between your overall income and your monthly payments on your existing debts. Different lenders have different ratios that they will work with, which may mean having to shop around if you cannot find approval for a second mortgage through your preferred lender.

Employment

Your employment history will be looked at, as it helps lenders to determine how reliable you are and how consistent your income is. If you have a long history of frequently changing jobs or long periods of unemployment, finding approval for a second mortgage might prove to be quite difficult.

Obtaining a second mortgage can be difficult and expensive, since lenders acknowledge the risk that they are taking by accepting second mortgage applications. If you can reasonably prove that you are capable of making on-time payments to all of your debts, your chances of being approved improve greatly. If your credit history is troublesome, you may need to instill better credit and debt management processes into your situation, improve your credit score, and try again some other time.

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About the Author: Sheri Croll