Risk

• When you finance a home, your lender assumes the risk that you might default on your loan payment. Lenders do not have to finance loans for people who are viewed as high-risk borrowers, such as people with low credit scores. However, other factors can cause a lender to think of you as high risk. If you have placed your home on the real estate market, few lenders will finance a second lien on your existing home because of the risk that you could default on the loan. If you are unable to sell your old home, you could default on the mortgage, resulting in a foreclosure sale. The second lien holder only gets any money after sale proceeds have been used to pay off the first lien in full. Therefore, lenders take a huge risk by writing second liens on homes that are for sale.
  
  

Income

• In order to qualify for a second mortgage, you must have enough monthly income to cover the new loan payments as well as all of your current credit obligations. Since second liens expose lenders to a greater level of risk, the interest rates on these loans are usually higher and loan terms are shorter than on first mortgages. Consequently, your monthly payments are high, which means you have to have a lot of surplus income to qualify for a loan. You can keep your payments low in the short term by taking out a variable rate, interest-only loan, but if rates rise, these payments could double or triple.
  
  

Bridge Loans

• In some instances, you can take out a second mortgage even if you have placed your home on the market. Some banks offer so-called bridge loans that you can take out against one house to make a down payment on another home. Typically, you can only obtain a bridge loan if you are financing the bridge loan and the mortgage on your new home with the same lender. You end up paying more for the mortgage on the new home then you would if you got a purchase mortgage in isolation, because the lender mitigates some of the risk associated with the bridge loan by charging higher fees and a higher interest rate on the purchase loan.
  
  

Other Considerations

• Many people who borrow against their current home to finance the purchase of a new home, end up with more debt than they can handle if they are unable to sell their old home. If you go into foreclosure, you not only lose your old home but the foreclosure stays on your credit report for seven years and makes it very hard to obtain credit in the future. Additionally, if a foreclosure sale fails to raise enough money to cover your mortgage debt, laws in some states enable lenders to pursue for payment of remaining mortgage balance. Therefore, bridge loans sometimes create rather than solve problems.