A second loan is commonly thought of as just a way to avoid mortgage insurance.
The world famous 80-10-10. And yes they are fantastic for that and that is our primary use of a 2nd loan. There are however so many more creative uses for 2nd loans that can open up a world of opportunity for buyers.
I have put together two of my favorite uses for the current moment.
In the below scenarios I am assuming this is a primary home purchase and the borrower owns no other properties.
1) To Avoid Reserves Requirement:
Jumbo lenders have reserve requirements varying from 6 months PITI (principal, interest, taxes and insurance) to 12 months. Sometimes you may have 10% down but not enough reserves. With a 2nd you can do a conventional 1st and put the remainder on the 2nd to avoid the reserve requirement. Conforming loans do not have reserve requirements and one of the 2nds we work with does not as well.
A great example would be a Napa purchase 1 million dollars. Borrower puts down $100,000 but has only $20,000 after they pay closing costs. 1st loan would be $625,500 and the 2nd would be 274,500. There is no reserve requirements for this structure.
2) Avoiding Jumbo gift rules:
Getting 10% gift money? If it is a jumbo loan there are requirements on how much of the down payment must be your own. However if you do a conforming 1st and add a 2nd they do not have minimum down payment requirements required from the borrower. This means that you can get into that nice 900k house with a 10% gift.
In the past 2nd loans had a bad rap because they were given away like McDonalds happy meal toys.
Those days are long gone and you do have to qualify for them and in terms of credit and debt to income they are more restrictive then normal guidelines. They are not predatory loans. The 2nd that I primarily uses requires a 720 credit score and the debt to income cannot exceed 43% so please keep that in mind.
2nds are a great way to help buyers get into today’s market. They can do a lot more than just avoid mortgage insurance.