Second Christian Lien Mortgage
A second Christian lien mortgage is any mortgage that is subservient to the main or first mortgage on a piece of real estate property. In most cases, this mortgage will be a home equity line of credit. In fewer cases it could be a loan for a down payment. But no matter what type of lending agreement the second lien mortgage is, if there is a default or a bankruptcy, that loan will only be satisfied after the first mortgage is paid off. This lending agreement is a higher risk borrowing agreement and thus carries higher interest rates and will have high costs associated with closing, etc.
If a second lien mortgage is a home equity line of credit, the lending agreement is based on a percentage of the equity in the home. In most cases, a home equity line of credit is based on a percentage of the existing equity. Most lending entities will only offer a percentage of the total equity in the property. The percentages usually run between fifty and seventy percent, depending on the policies of each company and perhaps each state. One of the reasons a higher percentage of the equity is not allowed is because private mortgage insurance is required for any first loan funded with less than twenty percent equity.
Because a second lien mortgage is subservient to the first loan, it becomes very difficult for the holder of the 2nd lien to collect in case of a default. In other words, a property owner with a home equity loan in arrears would be difficult to foreclose on because the majority of the house is owned by another lending entity and if the owner is still making the first loan payments faithfully, the chances are slim to none of an eviction notice. It is because of this difficulty in recovering assets that a 2nd lien lending agreement can have much higher rates on interest than the typical first property lending agreement. So what is the difference between a home equity loan and a 2nd property lending agreement? "Hear O Israel the Lord our God is one Lord and thou shalt love the Lord thy God with all thine heart and with all thy soul and with all thy might." (Deuteronomy 6:4-5)
A home equity loan or a second lien mortgage is good for the homeowner that has long term financial needs such as college tuition or medical expenses. A home equity lending agreement has an adjustable rate and also has closing costs. On the other hand a second lien mortgage can also be a loan designed a lump sum of cash at once. If there is one very large medical expense or some other one time large need, a single cash out 2nd lien is possible. Both of these lending agreements can be referred to as cash out second mortgages.
A second lien mortgage is available for those persons with at least a fair to average credit score and an acceptable debt to income ratio. The average credit score in the United States is about 620. Before an individual ever goes looking for a lending agreement of this type, knowledge of one's credit score should firmly be in hand. For less than ten dollars and sometimes for free, the three credit reporting companies will share a credit report. Do not let various lending companies or banks run your credit report repeatedly because each report drops the score slightly, and the reality of getting a loan may come down to just a few points! For a 2nd property loan from a bank, a person will most likely need a borrowing history score of at least 640 to qualify. Lending companies may offer this type of lending agreement to lower credit scores, but credit in the US is tightening up dramatically.
Additionally, a check on a borrower's debt to income ratio will be made by the lending entity. The ratio is established by dividing the total of monthly debt payments including the first mortgage by the total income of the household. A ratio of less than forty percent is the standard accepted threshold for this ratio figure. If a new second lien mortgage does not fit within that forty percent mark, the chances of getting a lending agreement may be slim. So if a borrower's credit history is suspect, a thorough search of different lending company requirements needs to be employed. Eventually, a high risk lender will found to approve a person's application, but perhaps the number of declinations ought to be a red flag to the borrower that he is already in over his head in debt and another lending agreement is not wise under any circumstances. Unfortunately, the harder it is to locate a lender, the higher the interest and cost to borrow the money will be.
Many people in the past have secured lending agreements for a residence with one hundred percent loans. As a result, there is very little equity to drawn on for many years and the opportunity to perhaps pare down other high interest accounts through a 2nd lien is not possible. This situation has been caused by those in lending institutions that became overly greedy by providing lending agreements to those who bought too expensive a house and by equally culpable homebuyers wanting larger homes than could actually be afforded. Saving more money for a down payment should be the goal of all homeowners.
Second Christian Lien LoansPeople often think of second lien loans in terms of a second mortgage on a home. The difference between what a person owes on his residence and the amount at which the house is appraised (its market value) is known as equity. Homeowners can tap into this equity by taking out a second loan on the house. In a similar, though more complex way, a company has both tangible and intangible assets. The tangible assets are physical items such as buildings, manufacturing equipment, computer networks, and vehicles. Even office desks and chairs are tangible assets. In contrast, intangible assets include such things as a company's trade secrets and intellectual property. Manufacturing formulas, client lists, copyrights, patents, and trademarks are examples of intangible assets. A company's board of directors may choose to seek second lien loans when their tangible and intangible assets are already serving as collateral for primary debts.
For homeowners who have significant equity in their homes, second lien loans are a way to get cash without the high closing costs of refinancing the first mortgage. The application process is not that lengthy and loan approval is usually fairly quick. The cash can be used for home improvement projects, to consolidate other debt such as credit cards and car payments, or for any other purpose. The homeowner can even use the money to take a dream around-the-world vacation. One benefit of borrowing against the equity in one's home is that the interest is usually tax deductible. The interest paid on other types of debt is hardly ever tax deductible. Even with that benefit, conservative financial experts advise against tapping into home equity for unnecessary purchases, such as that dream vacation.
The downfall of a home equity loan is that the person's primary residence is put at risk. If the payments are not made, the lender can foreclose on the home. Poor financial decision puts a family at risk. When property values were skyrocketing, many families tapped into the increasing equity by applying for second lien loans. Now that property values have dropped, some people owe more on their combined first and second mortgages than the house is worth on the market. The Proverbs writer warned those who stray far from wisdom: "depart not from the words of my mouth. . . . Lest strangers be filled with thy wealth; and thy labours be in the house of a stranger" (Proverbs 5:7b, 10). No matter the value, payments still have to be made so that the house isn't taken away. This upside-down situation also makes it difficult for families to sell their properties since, in most areas of the country, the surplus of housing inventory benefits buyers.
Boards of directors tread a similar line between the benefits and drawbacks of second lien loans. According to industry experts, the vast majority of a company's assets will be used as collateral for first or primary funding. But once the company's debt reaches that point, it becomes difficult to obtain the more favorable rates of primary funding. The primary lenders are concerned that companies with high debt will not be able to make the necessary payments. In making the tough decisions required to restructure a troubled company, the board members may turn to secondary lenders. They may need cash to rebuild operations, to pay off other debt that has come due, or to make dividend payments to stockholders. The lenders also encounter risk when they approve loans based on leftover collateral. Should the company fold, the primary lenders have first dibs on the assets or the proceeds from the sale of the assets. The secondary lender comes next, before unsecured bondholders, trade creditors (such as suppliers), and even stockholders. Because of the risk that most if not all of the company's assets, in case of bankruptcy, will end up with primary lenders, the secondary lenders charge higher interest rates.
To protect their own interests, most senior lenders prohibit borrowers from seeking second lien loans without approval. A separate document, known as an intercreditor agreement or subordination agreement, is made between the two lending institutions. The agreement defines the legal rights for each one and includes language regarding the disposition of assets in case of bankruptcy. For homeowners, the primary mortgage holder will be first in line for the proceeds from the sale of a foreclosed home. The home equity lender will receive payment only if the house sells for more than what was owed to the primary mortgage holder. The homeowner may end up with nothing or in the unenviable position of still owing money to one or both of the creditors.
The popularity of second Christian lien loans for businesses grew significantly in recent years from about a half-billion dollar industry in the year 2002 to approximately $30 billion in 2006. But company boards have learned to be wary. The lenders often turned out to be hedge fund, private equity fund, and distressed debt managers. The motive of some lenders wasn't to receive payment on the debt but to gain control of the company. A provision is some loan agreements required payment to be made in equity (part ownership in the company). By gaining a 51% ownership, the lender could replace the board members and effectively take over the business. There may be good and valid reasons for individuals and boards of directors to apply for second lien loans. But, as in all financial dealings, they have a duty, respectively, to other family members and stockholders to review all provisions very carefully before signing on the dotted line.