Taking out a third mortgage is significantly more difficult than it was a few decades ago, when this type of mortgage was a lot more common. Third mortgages were given out without any strict requirements that are necessary to protect the lender, and that resulted in a housing crisis which caused many people to lose their homes. Nowadays, lenders are much more careful when giving out third mortgages, and most are actually choosing not to give out another mortgage to borrowers who are already in the process of paying back two mortgages.
Normally, when a borrower with multiple mortgage defaults, the first mortgage is prioritized over other mortgages, making a third mortgage a high risk for lenders. In case of a default, third mortgage lenders have to wait until the lenders for the first and second mortgage recover their money. Even if a lender agrees to give out a third mortgage, the interest rates on this mortgage will be much higher than the ones on your first mortgage and even the rates on your second mortgage.
These mortgages are based on collateral, so the higher the value of the collateral, the bigger the chance that the borrower will receive the third mortgage without much difficulty. If the borrower defaults, then the asset used as collateral, usually a home, will go into foreclosure, and the lender recovers part or all of his money.
What are Third Mortgages Used For?
While first and second mortgages usually pay for the home itself, third mortgages are usually taken out in order to make home improvements or repairs, which help increase the value of the property. They can be used to make additions to the home, such as a swimming pool or a garage, or to renovate the kitchen, the bathrooms or other areas of the home.
Securing a third mortgage is difficult and you must keep in mind that you will most likely have to make monthly mortgage payments on all three of your mortgages at the same time each month, and that the third mortgage will come with a much higher interest rate than the other two.
How to Get a Third Mortgage
Getting a third mortgage begins with shopping around for a lender willing to give you one. First, talk to your current lender, which may give you a good deal if you are a good borrower, with no missed or late payments on your first two mortgages. Even if your current lender agrees to give you a third mortgage, it never hurts to look around a bit more, because you could find an even better deal with a different lender. You will need to submit several documents, and your lender will verify everything, including your credit report. Besides documents such as your Social Security number and place of employment, you will need to submit documents that prove your income, such as a W-2 form and pay stubs.
You will have to pay for an appraisal in order to determine how much equity is in your home. The lender will decide how much you can borrow on a third mortgage based on the equity in your home. If everything is in order and the lender is satisfied with the equity in your home, they will grant you the third mortgage loan and you will have to pay the closing fees.
If you have a good financial situation and enough equity in your home, taking out a third mortgage shouldn’t be extremely difficult. But keep in mind that the lender will protect himself by having very strict lending requirements for such a loan, and probably give you a much higher interest rate.