What Is a Third Mortgage?
A third mortgage is a loan that is prioritized lower than first and second mortgages. This type of loan was more common in the 1970s and 1980s, before scandals on savings and loans changed the way home mortgages were handled. At that time, these loans were given more freely, without the scrutiny and care necessary to protect lenders and homeowners, which resulted in thousands of people losing their homes. Today, mortgage lenders are more cautious about issuing third mortgages and, while properties with three mortgages still exist, there are understandably fewer lenders willing to issue them.
Securing a third mortgage is difficult because of the significant risk of foreclosure. As a general rule, in a foreclosure proceeding, the first mortgage lender is given preference over lower prioritized mortgage loans. In the event that the same property holds more than one mortgage and the borrower falls into default, the original mortgage lender is first in line to recover their money. The second mortgage lender is next, followed by the third. Lenders who issue third mortgages have the least amount of security and, as a result, interest rates on third mortgages are high.
Qualification criteria includes credit scores, income and other mortgages. Most loans are based on collateral, which is usually the value of the real estate. The higher the value of the collateral, the more chance the borrower has of obtaining the desired amount. If the borrower defaults, the collateral – usually the home – reverts to the lender and the home eventually goes into foreclosure.
Third mortgage loans do have some benefits. Homeowners often use the money to enhance or preserve the value of their home and are typically in the form of consolidation loans, mortgage refinancing and lines of credit. A lender will assess equity in other mortgages, income, debit, credit score and employment history when considering an application for a third mortgage.
It’s important to keep in mind the total amount of regular payments on all previous mortgages to decide whether another mortgage is practical, and it’s just as important to remember that monthly payments are required to be paid on all three mortgages simultaneously. If a third loan is approved, it would be at a much higher rate of interest compared to the earlier mortgages.
Securing a third mortgage is not easy, so make sure you do your research and consider all the financial implications.