Second mortgage lenders usually require a debt-to-income (DTI) ratio of no more than 43%, although some lenders may stretch the maximum to 50%. Your DTI ratio is calculated by dividing your total monthly debt, including both mortgage payments by your gross income.
To be approved for a second mortgage, you'll likely need a credit score of at least 620, though individual lender requirements may be higher. Plus, remember that higher scores correlate with better rates. You'll also probably need to have a debt-to-income ratio (DTI) that's lower than 43%.
Most lenders look for a DTI ratio of 43% or less, although some will accept up to 50%. Over 50%. If you have a DTI ratio over 50 and you want to get a mortgage you will need to try increasing your income and reducing your debt. It may take some time but with effort it is possible.
Using the second mortgage to pay off other loans or outstanding credit card balances is arguably another good reason — especially if those obligations carry a higher interest rate. Replacing more expensive debt with cheaper debt can be a smart financial strategy.
Second mortgages are often riskier because the primary mortgage has priority and is paid first in the event of default. The difference between the home's current market value and any remaining mortgage payments is called home equity.
You could lose your home if you don't pay back a second mortgage. Interest rates can be higher than refinancing. You might not qualify if you don't have enough equity or appraisal value. Second mortgages can be costly with appraisal fees, credit checks and closing costs.
As a general guideline, 43% is the highest DTI ratio a borrower can have and still get qualified for a mortgage. Ideally, lenders prefer a debt-to-income ratio lower than 36%, with no more than 28% of that debt going towards servicing a mortgage or rent payment. 2 The maximum DTI ratio varies from lender to lender.
How much debt can I have and still get a mortgage? This varies by lenders. But most prefer that your monthly debts, including your estimated new monthly mortgage payment, not equal more than 43% of your gross monthly income, your income before your taxes are taken out.
On a second home, however, you will likely need to put down at least 10%. Because a second mortgage generally adds more financial pressure for a homebuyer, lenders typically look for a slightly higher credit score on a second mortgage.
A key financial metric to assess is your debt-to-income (DTI) ratio. To comfortably afford a second property, your DTI should ideally not exceed 45%. While this threshold is a general benchmark, having a favorable credit score, a substantial down payment or considerable cash reserves can provide added flexibility.
Lenders usually prefer a front-end DTI of no more than 28 percent and a back-end DTI of 36 percent — often referred to as the 28/36 rule. In some high-cost areas, they may allow the ratios to be greater. Following these guidelines prior to purchasing a home can help you avoid the possibility of becoming house poor.
Some loans have more flexible lending criteria that allow you to qualify for a home loan with a high DTI ratio. For example, FHA loans for first-time home buyers allow DTIs as high as 50% in some cases, even with less-than-perfect credit.
A ratio closer to 45% might be acceptable depending on the loan you apply for, but a ratio that's 50% or higher can raise some eyebrows. Simply put, having too much debt relative to your income will make it harder to qualify for some home loans.
A general rule of thumb is to keep your overall debt-to-income ratio at or below 43%. This is seen as a wise target because it's the maximum debt-to-income ratio at which you're eligible for a Qualified Mortgage —a type of home loan designed to be stable and borrower-friendly.
35% or less: Looking Good - Relative to your income, your debt is at a manageable level. You most likely have money left over for saving or spending after you've paid your bills. Lenders generally view a lower DTI as favorable.
The Federal Reserve tracks the nation's household debt payments as a percentage of disposable income. The most recent debt payment-to-income ratio, from the second quarter of 2023, is 9.8%. That means the average American spends nearly 10% of their monthly income on debt payments.
Key takeaways
Debt-to-income ratio is your monthly debt obligations compared to your gross monthly income (before taxes), expressed as a percentage. A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt.
A DTI ratio is usually expressed as a percentage. This ratio includes all of your total recurring monthly debt — credit card balances, rent or mortgage payments, vehicle loans and more.
Broadly speaking, there are two ways to improve your DTI ratio: Reduce your monthly debt payments, and increase your income.
These include medical bills, tuition, home remodeling, debt consolidation, vehicles, or big events like a wedding. You can take out a second mortgage after you've built equity in your home, usually through paying down a portion of the outstanding principal on your first — or primary — mortgage.
Consider the potential impact on your credit score
Making on-time payments on your second mortgage is just as important as making on-time payments on your first mortgage. Defaulting on either payment could lead to a negative mark on your credit score, making it difficult to borrow money in the future.
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.
Down payment requirements for a second home
If you have a lower credit score or higher debt-to-income ratio, your mortgage lender may require at least 20% down for a second home. A down payment of 25% or higher can make it easier to qualify for a conventional loan.