First Mortgage

What Is a First Mortgage?

A first mortgage is a primary lien on a property. As a primary loan that pays for the property, the loan has priority over all other liens or claims on a property in the event of default. A first mortgage is not the mortgage on a borrower’s first home; it is the original mortgage taken on any one property. It is also called First Lien. If the home is refinanced, then the refinanced mortgage assumes the first mortgage position.

Understanding First Mortgages

When an individual wants to buy a property, they may decide to finance the purchase with a loan from a lending institution. The lender expects the home loan or mortgage to be repaid in monthly installments, which include a portion of the principal and interest payments. The lender will have a lien on the property since the loan is secured by the home. This mortgage taken out by a homebuyer to purchase the home is known as the first mortgage.

The first mortgage is the original loan taken out on a property. The homebuyer could have multiple properties in their name; however, the original mortgages taken out to secure each of the properties comprise the first mortgage. For example, if a property owner takes out a mortgage for each of their three homes, then each of the three mortgages is the first mortgage.

First Mortgage and Loan-to-Value (LTV)

If the loan-to-value (LTV) ratio of a first mortgage is greater than 80%, lenders generally require private mortgage insurance (PMI). In such a case, it sometimes can be economical for a borrower to limit the size of the first mortgage to 80% LTV and use secondary financing to borrow the remaining amount needed.

The economics of paying PMI versus using a second loan largely depend on the rate at which a borrower expects the value of their home to increase. PMI can be eliminated when the LTV of the first mortgage reaches 78%. However, a second lien, which typically carries a higher interest rate than a first mortgage, must be paid off. This is most likely done through refinancing of the first mortgage for an amount equal to the remaining balance of both the first and second mortgages.

Taxes on a First Mortgage

The mortgage interest paid on a first mortgage is tax deductible. This means that homeowners can reduce their taxable income by the amount of interest paid on the loan for the tax year. However, the mortgage interest tax deduction is only applicable to taxpayers who itemize expenses on their tax returns.

First Mortgage Requirements

Requirements for a first mortgage can vary, based on the type of loan that you’re taking out. First mortgage requirements can vary based on whether you’re choosing a conventional loan or a government-backed loan, such as a Federal Housing Administration (FHA), U.S. Department of Agriculture (USDA), or U.S. Department of Veterans Affairs (VA) loan.

These requirements can affect:

The type of property can also matter when getting a first mortgage. FHA loans, for example, allow you to purchase a one- to four-unit home with just 3.5% down and a credit score as low as 580. But the property itself must meet certain standards to qualify for the loan.

Important

Poor credit is not necessarily an absolute roadblock to getting a first mortgage, but it can affect the loan terms that you qualify for and the interest rates that you pay.

First Mortgage vs. Second Mortgage

The term “first mortgage” leads one to understand that there could be other mortgages on a property. A homeowner could take out another mortgage, such as a second mortgage, while the original and first mortgage is still in effect.

A first mortgage represents the primary debt owed on a property where that property serves as collateral for the loan. A second mortgage is a junior lien that you take out against your home when you still have a first mortgage outstanding.

Second mortgages are subordinate to first mortgages. So if you sell the home, for example, any proceeds would be used to pay off the first mortgage, then the second mortgage. Common examples of second mortgages include home equity loans and home equity lines of credit (HELOCs). You may take out one of these second mortgage loans if you wish to borrow against the accumulated equity in your home.

First Mortgage vs. Second Mortgage

First Mortgage

Second Mortgage

May have fixed or variable rates

Home equity loans often have fixed rates, while home equity lines of credit (HELOCs) tend to have variable rates

Home is used as collateral for the loan

Home is used as collateral for the loan

Primary lien, meaning lienholders get paid first

Secondary lien, meaning lienholders are paid after primary lienholders

Loan limits are determined by the type of loan and borrower eligibility

Loan limits may range from 75% to 100% of the equity in the home

Subject to private mortgage insurance (PMI), depending on the loan type and down payment

PMI doesn’t generally apply, though taking out a home equity loan or a HELOC might affect PMI requirements on a first mortgage

Your ability to qualify for a second mortgage home equity loan or home equity line of credit (HELOC) can depend on your credit scores, income, and how much equity you’ve accrued in the home.

Example of a First Mortgage

For example, if a homebuyer secures a $250,000 first mortgage on a home property and, after several years, obtains a second mortgage for $30,000 on the same property, then the first mortgage is senior to the second mortgage.

The borrower defaults on his payments after he has already repaid $50,000 of the original loan amount, and his property is foreclosed and sold to cover the loan. If the proceeds from the sale of the property add up to $210,000, then the first mortgage lender will receive the balance owed, which is $200,000.

The second mortgage lender will receive whatever is left — in this case, $10,000. Because a first mortgage is a primary claim that takes precedence over secondary claims, second mortgages usually command higher interest rates than first mortgages.

If you’re struggling with mortgage payments, then a loan modification, short sale, or deed in lieu of foreclosure are some of the options for managing first and second mortgage debt.