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Banks and other lenders generally have specific rules--known in lending as underwriting standards--that must be followed before they originate either a first or second mortgage, and second mortgages generally have a few extra standards of their own.
As with a first mortgage, the borrower must have a steady income, either from employment or other sources, and a large enough income to support monthly payments on the loan. Just as important, borrowers must be able to document that income. This can be a simple matter of providing pay stubs or W2s, but for the self-employed or small business owner, it might mean offering tax returns or 1099 income statements or other documents for the lender to examine. The lender decides which documents the applicant must produce.
The lender will also run a credit check on a second-mortgage applicant. In its most basic form, a credit check consists of the lender contacting one or more of the three major credit bureaus. Persistent trouble with paying debt of any kind, including other loans or credit card
debt, is generally going to be a red flag for lenders and thus make it more difficult to obtain a second mortgage.
The lender will also want an appraisal to be done on the property to establish a reasonably accurate estimate of its current market value. Each lender has its own ideas about what counts as an acceptable appraisal. From that value, the lender will then subtract the amount outstanding on the first mortgage to make a determination of how much equity the applicant has in the house. The more equity, the more likely a second mortgage will be offered.
Each lender has its own standards about how much equity is necessary to support a second mortgage, but they do have standards. Gone are the days when a homeowner could borrow more that his or her equity in the property, since that kind of lending assumed that the value of housing always increased. No one makes that assumption any more, and in fact most lenders these days won't allow borrowers to borrow more than a certain percentage of the total equity.