There are many reasons you might consider a second mortgage or multiple mortgages. Whether you have your eye on a vacation property or want to invest in real estate, knowing what’s possible is crucial when managing your finances. But after a second mortgage, where’s the limit? Let's take a look.
How Many Mortgages Can You Have at Once?
Technically, there is no limit to how many mortgages you can have. When you demonstrate enough wealth or collateral, few limits are imposed on how many mortgages you can have at once. However, some qualifications may cap your total. Generally, traditional lenders will not finance more than four properties.
Another consideration is your total debt load. Your total debt service (TDS) ratio, a combination of your total monthly housing plus other debts, should be less than 44% of your gross income.
It’s possible to qualify if your TDS ratio is slightly higher. However, you’re increasing risk, potentially taking on more debt than you can afford.
How to Finance Multiple Properties
Another common question that real estate investors have is, “how to finance multiple properties?” While the investors are allowed to have up to 10 investment mortgages, they certainly can’t do this through typical conventional loans. So instead, these are three different options that investors can utilize to finance their multiple properties.
1. Blanket Loans
A blanket loan typically finances more than one property. By using a blanket loan, a landlord or real estate investor needs one loan to finance multiple properties rather than getting multiple mortgages for each investment property.
Now the question is, “how many blanket loans can you have?”. The answer is the same here as well. In theory, you are allowed to have as many blanket loans as you need. In addition, blanket loans provide an obvious benefit as it offers greater efficiency and saves a lot of time. They also turn out to be cheaper than individual loans as it saves application and closing costs required for each property.
When it comes to how many properties can be covered under one blanket loan, it depends on what your lender allows. They have requirements that are similar to hard money and private money loans. For a blanket loan, the lenders usually tend to focus on the borrower’s cash reserves.
2. FNMA 5-10 Properties Program
FNMA set up a program to allow investors to benefit from 10 investment mortgages. This program is called the 5-19 Properties Program. The requirement for this program varies from conventional mortgage loans in various ways, including the required credit score, down payment, and a few other things. These are the criteria a borrower must meet to qualify for this program.
Criteria-
A minimum credit score of 720
Should already own 5-10 properties with financing
25% down payment on each property and 30% for 2-4 units
No late monthly mortgage payments during the past year
A 30% equity is required in case of a mortgage refinance, regardless of the property type
Two years of tax returns showing rental income from all properties
No bankruptcy or foreclosure in the past seven years
Six months of cash reserves to cover Principal, Interest, Taxes, and insurance on all properties
Sign a 4506-T form
These requirements are rather strict, which is why not many investors can get approved for it and have to opt for other financing options.
3. Hard Money and Private Money Lenders
A more popular and feasible financing option among investors is Hard Money and Private Money Lenders. The one reason behind it is that these loans are open to negotiation and do not require any hard and fast set of requirements. Private Money Lenders often allow investors as many mortgages as they require depending if they fulfill the lender’s criteria.
These private mortgages are typically for a shorter term compared to conventional loans. As a result, the interest rates on these mortgages are much higher. The lenders usually don’t look at the credit score. Instead, the deciding factor for them is the value of the investment property because the investor is interested in the mortgage rates that the investor is willing to pay.
Due to their flexibility and ease of negotiation, private money lenders and hard money are among the top options for financing multiple properties.
The Risk Of Multiple Mortgages
With many lenders, it’s possible to have four mortgages at once. However, what’s generally allowed and what you can manage are separate issues. Your lender may determine you can afford multiple mortgages, but keeping track of payments and finances can be challenging.
Some financial institutions or mortgage companies consider homeowners with multiple properties risky investments. The more properties and mortgages you have, the more likely you’ll encounter mortgage difficulties. They may deny your loan or increase the interest rate.
For example, say your rental properties are located in the same region. Then, there’s a sudden downtown in the area’s real estate value. As a result, all your rental properties are less attractive to potential renters.
Consider another scenario: You have multiple residential properties in the same flood zone. When the area experiences flooding, it can lower home values—even if only one of your homes is directly affected.
Benefits of Multiple Mortgages
The benefits of having more than a mortgage depend on whether it’s a residential or commercial property. For rental properties, you may generate more income, build a brand, or enjoy tax benefits. Homeowners with multiple mortgages may benefit from the following:
A Higher Loan Amount: second mortgages are secured by your first home, which increases your collateral; therefore, you may have access to a higher loan amount.
Lower Interest Rates: generally, a second mortgage offers a lower interest rate; however, if the property in question has additional risks, or it’s your third or fourth mortgage, the rate may increase.
Conclusion
Whether you're a commercial or residential mortgagor, there are always risks and benefits when it comes to mortgaging multiple properties. Navigating the ins and outs can be challenging, but we hope this article helped. If you still have questions or need help figuring out what you can qualify for, working with a mortgage broker can help you determine what’s appropriate for your property and financial goals.