“If the borrower is relocating and re-establishing residency in another area not within reasonable commuting distance from the current principal residence, the borrower may obtain another mortgage using FHA insured financing and is not required to sell the existing property covered by an FHA insured mortgage.”
The secondary mortgage market allows investors to buy mortgage-backed securities (MBS), entitling them to principal and interest from mortgage payments. These MBS are often made available by major mortgage investors like Fannie Mae, Freddie Mac, the FHA, and VA.
A second mortgage or junior-lien is a loan you take out using your house as collateral while you still have another loan secured by your house. Home equity loans and home equity lines of credit (HELOCs) are common examples of second mortgages.
FHA loans are a popular type of home loan that requires a 580 FICO® Score and a 3.5% down payment. One “downside” to FHA loans is that – under most circumstances – you can only have one FHA mortgage at a time.
If you're currently in the market looking to buy a triplex or fourplex with FHA financing, you need to see if the property's rents pass the Self-Sufficiency Test. To be “self-sufficient” means that 75% of the property's rents need to cover the monthly payments.
For instance, the minimum required down payment for an FHA loan is only 3.5% of the purchase price.
Risk of foreclosure
This is one of the biggest risks of second mortgages. With a second mortgage, you're using your home as collateral. That means if you don't make your payments, your lender can foreclose on your house to pay off the balance.
If you take out a $50,000 home equity loan, you will receive all of the money at once and pay interest on the full amount. With a HELOC, you can withdraw money whenever you need it.
The mortgage
Lenders may require 20% or more down payment and second home lending is not offered in many lower down payment programs, such as FHA. If this is a property you plan to rent, plan for up to a 30% down payment.
The Federal Home Loan Mortgage Corporation (FHLMC), conveniently named Freddie Mac, is a government sponsored entity (GSE) that buys mortgages from lending institutions in order to expand the secondary real estate market.
Jumbo loans, portfolio loans and other non-conforming loans are considered higher-risk loans and are generally not sold on the secondary market. As a result, most lenders prefer to offer conventional or conforming loans to borrowers.
In the primary mortgage market, lenders make loans to borrowers at a certain interest rate, whereas in the secondary market, lenders securitize these loans into mortgage-backed securities (MBS) and sell them to investors.
FHA loan rules DO allow the owner/occupier to rent out the unused living spaces in the home to others, and in certain circumstances you may even be allowed to use the income potentially generated from such rentals to qualify for the mortgage.
You can purchase multiple homes with FHA loans under the following circumstances: You're relocating for a new job opportunity. This is common if your new job takes you to a different state and you haven't been able to sell your current home.
Assuming a borrower who has spent up to their HELOC credit limit, the monthly payment on a $50,000 HELOC at today's rates would be about $372 for an interest-only payment, or $448 for a principle-and-interest payment.
While the Fed's ongoing rate cuts might reduce borrowing costs on HELOCs in 2025, a home equity loan might be a better long-term option if you expect rates to rise during your loan term. Home equity loans are a great option if you need a large, lump-sum payment to fund a large expense.
To illustrate, here's what the costs would be on a $75,000 HELOC for both 10- and 15-year repayment periods: 10-year HELOC at 9.37%: $965.15 monthly, totaling $40,818.17 in interest paid. 15-year HELOC at 9.37%: $777.30 monthly, totaling $64,913.27 in interest paid.
Although most second-mortgage lenders state that they don't charge closing costs, the borrower still must pay closing costs in some way—the cost is included in the total price of taking out a second loan on a home.
Understand why you were denied
Frequently, it is tougher to get a second mortgage than a primary mortgage. While HELOC rejection rates are the lowest in four years, about half of applications are still denied, for example.
Home equity loans, home equity lines of credit (HELOCs), and refinancing all allow you to access your equity without needing to pay taxes. In many cases, the interest you pay on your loans can be tax-deductible.
You may be denied for an FHA loan if you have declared bankruptcy but you have not had the bankruptcy discharged. You may be denied if you are delinquent on federal taxes or otherwise owe money to the federal government but without an approved payment plan.
If you put 20% down on an FHA loan, you would pay a lower annual mortgage insurance premium. The premium requirement would also stop after 11 years. However, if you have 20% to put down and your credit score is 620 or higher, you may want to pursue a conventional loan instead.
Credit score requirements
Most first-time home buyer programs require a minimum credit score, often around 620, to qualify for conventional loans. However, some programs, like FHA loans, are more lenient, allowing scores as low as 580 or even lower with higher down payments.