What does it mean when someone is buying a home and they have to have a first and second mortgage?
Answer:
There are several things to mention here.
One is that they probably didn't have a down payment, or atleast a down payment that was less than 20% of the purchase price.
Also, the second mortgage normally has a higher interest rate.
Your Credit scores have nothing to do with whether or not you have or need a second mortgage.
Often times, a lender will finance both the 1st and 2d mortgages.
Sometimes you can just get 100% financing with one loan but you'll have to pay PMI (private mortgage insurance). PMI covers ONLY the lender in case you ever default on your loan. Taking a split mortgage like an 80/20 lets you avoid the PMI because neither mortgage is more than 80% LTV by istelf, which is the cut-off point for the PMI requirement.
You'll also have two checks to write each month instead of just one.
I think that covered most of the main issues, I hope my answer helped.
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Usually, if someone buys a home with a 1st and 2nd mortgage they probably could not come up with mroe than 10% down and so are doing an 80-10-10% finance of the home. 80% through 1st, 10% via the 2nd and 10% via the down payment.
It's just a way to squeeze into a house in an expensive market (I can say this from personal experience). Usually the companies issuing the 2 mortgages are different (i.e Countrywide will not issue both) and the 2nd has a higher rate. But both are likely issued by a traditional mortgage broker or bank- nothing very risky like using a credit card company or something like that.
You just write 2 checks each month until you can close out the 2nd mortgage.
the first mortgage is the original mortgage on the house (the loan on the house on which you make monthly payments for maybe 30 years).
If a person has lots of money and puts a big downpayment on a home then they have money in that house where they could get a second mortgage (with the same bank or with another bank or mortgage company) on the house to get some money to make improvements to that house.
I do real estate and I don't understand why people would take out a second mortgage "right away" as those needed improvements could and should be made by the seller and put into the "original mortgage" loan so there is no need for 2 loans.
Compared with a first mortgage with an LTV or 90% or 100% that requires mortgage insurance, it can be cheaper to have an 80% LTV first mortgage with low interest rate & high interest rate 2nd mortgage for some or all of the remaining 20%. This is particularly true since interest is tax deductible & mortgage insurance, generally, is not.
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