Can You Have a Secondary Lien On Your FHA-Insured Mortgage?
The Federal Housing Administration, or FHA, is one of the largest mortgage insurers in the nation. This organization, which is part of the Department of Housing and Urban Development, does not actually give out loans, but instead provides financial support for loans that meet their specific guidelines.
The FHA has provided insurance for loans that have been used for the purchase of single-family homes all across the country. Essentially, lenders who give out FHA-approved loans will be insured against financial loss if the loan goes into default. This protection allows lenders to provide loans with far less risk, freeing up mortgages for many buyers. But lenders have to make sure the loans meet the detailed guidelines set by the FHA.
Many people assume that FHA loans won’t allow for second liens. However, there are many FHA-backed mortgages that allow for second liens of various types. The means you could get a secondary mortgage against your home, even if you have an FHA mortgage.
Yes, You Can Get a Secondary Mortgage Behind an FHA Loan!
What is a Secondary Lien?
A secondary lien, also called a junior lien, is essentially a loan that takes a back seat to another loan in the event of a default. Let’s pretend Jack Jackson currently owes $250,000 on his first mortgage. Later, he takes out a Home Equity Line of Credit to make repairs on his roof. Five years later, he still owes money on both loans but loses his job and is unable to make the payments. He has to give up the house through a foreclosure, which will help repay the money he owes. But which will be repaid first, the original mortgage or the HELOC? In most cases, the HELOC will be secondary, which means it will have to wait for the original mortgage to be repaid before it can be paid. In some cases, there may be no money left after the original loan is repaid.
For this reason, lenders are extremely hesitant to write loans that may be secondary, as the chances of not being repaid are higher.
Types of Available Second Liens
Second liens come in various forms and cover a wide variety of different loans. Essentially, to be qualified as a second lien, it simply needs to be subordinate to another loan. Usually second liens are either open-ended or close-ended. HELOCs, for example, are open-ended credit that is secured by real estate. These loan products differ from close-ended options because they involve a draw, which is the maximum amount you can draw from the line of credit. You might have a HELOC with, for example, a maximum draw of $10,000; it doesn’t mean you need to borrow the entire $10,000, but can borrow an amount as you see fit.
Close-ended loans involve borrowing a specific amount all at once. In most cases, they have a fixed payment based on the principle balance and interest owed on the loan. Repayment for these loans usually lasts about 15 to 30 years.
Why Use a Second Lien?
Second liens can be extremely beneficial to a borrower, functioning as supplemental financing for a homeowner. They can be picked up when you purchase a home, or they can be acquired long afterward, at a time when you need money for repairs or upgrades. They are most often used through a refinance transaction.
When you use one of these loans, you will owe the balance of the second lien as well as the original FHA-insured mortgage. The FHA, however, does not insure second liens or subordinate financing, and the money may come from another lender; it does not automatically have to come from the lender that provided the primary loan.
Second loans can not only help with repairs and remodeling, they can also be used to assist in the purchase of a house, or could be used to pay for emergency expenses.
A Second Lien Will Remain a Subordinate
The second lien will not be able to leapfrog the FHA mortgage; it must always remain subordinate. This is important, because the secondary position determines when it will be paid off. For example, if a borrower sells the home or refinances the loan, they will have to pay off the FHA loan first before paying off the second lien. If there is not enough remaining after the first lien is paid, the second lien holder will have to either accept the loss, wait for future payments, or try to recover their money through the seizure of assets.
The Benefits of Having a Second Lien
These loan products are beneficial because the FHA will insure a first mortgage that has a second lien assuming the second lien is from a government body. Specific independent non-profits can also provide second liens in the form of down-payment assistance. These programs help potential homeowners fund the home while providing low-interest second loans, which can be used for a down payment or to fund closing costs. These loans require no monthly payment but are usually due in full when the home is sold.
The FHA, however, does not allow for the financing of all forms of secondary loans, so you need to be particularly careful when making a selection. For example, the FHA will not allow for second liens with a balloon payment, which are loans that are amortized over a specific term but due entirely after a shorter time frame. They will also not allow loans with prepayment penalties, which would discourage the borrower from paying it off early. If you are considering these loans, you’ll also have to prove that you can comfortably afford the first mortgage and the second lien, as well as any housing expenses that come along with homeownership, such as taxes or insurance.
Helping You Make the Right Mortgage Choices
If you have any further questions about second liens on FHA mortgages, contact the team at San Diego Purchase Loans today. We have the experience and knowledge to help find the right mortgage for your specific needs, and we’ll be proud to answer all of your questions!