When homeowners build equity and want to borrow more using their property as collateral, secondary financing approval is essential. This approval is required because your primary mortgage lender holds the first lien on your home, which means they have the first right to be repaid if you default.
The process starts with your primary lender evaluating whether a second loan, such as a home equity loan or a home equity line of credit (HELOC), can be taken against your home without compromising their repayment priority. Secondary financing approval often involves a subordination agreement—a legal document where the second lender agrees their loan is junior to the first. Learn more about lien subordination in our article on Mortgage Lien Subordination.
Primary lenders weigh several factors before approving a secondary loan:
- Combined Loan-to-Value (CLTV): This ratio adds all loan balances secured by the property and divides by the home’s current value. Most lenders prefer a CLTV of 85% or less to maintain adequate equity buffer. For a detailed explanation of CLTV, see LTV vs CLTV.
- Creditworthiness: Lenders check credit scores (typically 680 or higher) and payment history to ensure you can manage the increased debt load.
- Debt-to-Income Ratio (DTI): Your income must comfortably cover both mortgage payments.
Common types of secondary financing requiring approval include home equity loans, HELOCs, and piggyback loans (such as the 80-10-10 loan structure explained in our 80/10/10 Loan glossary).
Remember, your primary lender’s approval is not automatic. They may deny approval to protect their financial interest. Additionally, the process can add time and sometimes fees to your loan closing, so plan accordingly.
For more information on managing multiple loans on your property and lender priorities, explore our resources on Mortgage Lien Subordination and Home Equity Line of Credit (HELOC).
References:
- Consumer Financial Protection Bureau, What is a home equity line of credit (HELOC)?
- Investopedia, Subordination Agreement: What It Is, How It Works
- Forbes, What Is A Second Mortgage And How Does It Work?}}}
