Can You Get a Home Equity Loan in Third Lien Position? What You Need to Know

Taking out a home equity loan or line of credit can be a great way to access funds for home improvements, debt consolidation, education expenses, and more. But what happens if you already have a first and second mortgage or lien on your property? Is it possible to get a home equity loan or line of credit (HELOC) in third lien position?

As a real estate investor and finance writer I often get asked this question. The short answer is yes it is possible, but it can be more difficult and there are important factors to consider. In this article, I’ll walk through everything you need to know about obtaining a home equity loan or HELOC in third lien position.

What is Lien Position?

When you take out any kind of loan secured by real estate as collateral, the lender places a “lien” on the property. This gives them legal claim to the property if the loan goes into default.

Lien position refers to the order of priority for claims on the property if it is foreclosed on. The first mortgage lender has first lien position, meaning they get paid first from the proceeds of a foreclosure sale. The second lien holder (often a HELOC lender) gets paid next, and so on.

So if you want to take out another home equity loan with an existing first and second lien, it would be in third lien position – meaning it has lower priority and claim to the property compared to the other loans.

Is a 3rd Lien HELOC Possible?

Yes, it is possible to obtain a HELOC or home equity loan in third lien position – but it can be more challenging. Here are some key points:

• You’ll need sufficient equity. Lenders want enough equity cushion to feel comfortable lending in third position. Many require at least 15-20% equity after taking out the third lien.

• Underwriting is stricter. Because the risk is higher, lenders will scrutinize your income, credit score, debt-to-income ratio, and other factors more closely. Minimum credit scores around 700+ are typical.

• Rates and fees may be higher. Lenders need to offset the additional risk somehow. You’ll likely pay a higher interest rate and origination fees for a 3rd lien HELOC.

• Loan amounts are lower. With less security, lenders will limit the maximum amount you can borrow compared to a first or second lien. Loan-to-value ratios of 80% or below are common.

• Prepayment penalty possible. Some third lien lenders include a prepayment penalty to ensure they recoup costs if you refinance or pay off the loan early.

So the process is tougher, but still feasible if you have sufficient home equity and meet the stricter underwriting criteria. Shop around to multiple lenders to find the best rates and terms.

Alternatives to Consider

While possible, a third lien home equity loan may not always be the best option. Here are a few alternatives to consider:

• Refinance first mortgage. Rates are still relatively low compared to historical averages. You may be able to cash-out refinance your first mortgage to a higher balance and lower rate, paying off the second lien in the process. This eliminates the need for a third lien.

• Take out second lien. If you don’t currently have a second lien, consider taking one out instead of going straight to third position. Underwriting may be easier, rates lower, and more lenders willing to work with you.

• Use HELOC first. If you have an existing HELOC with available credit, use that before opening a third lien. Even if rates are higher, it avoids another lien.

• Explore other funding sources. Personal loans, business lines of credit, tapping retirement funds, or loans from family could be cheaper sources of financing than a third lien home equity loan with high rates/fees.

Look at the big picture to make sure a third lien HELOC or home equity loan makes overall financial sense for your situation. In many cases, there may be better options.

What is Subordination and Why Does it Matter?

If you’re considering getting a third lien home equity loan or HELOC, the topic of subordination will likely come up. Here’s what you need to know:

Subordination refers to the process of changing lien position priority on a property. To add a third lien, the existing second lien holder must agree to “subordinate” their position to the new third lien loan. This pushes them lower in priority for claims on the home if foreclosed.

Most lenders will require the second lien holder’s consent and a signed subordination agreement before providing a third lien loan. This protects their interests and ensures the third lien does in fact have lower priority.

The subordination process may involve fees from the second lender. The new lender may also require title insurance updates to reflect the change in lien position after subordination.

If the existing second lien holder won’t subordinate, that can derail plans for a third lien home equity loan. The second lender is not obligated to subordinate, so you have to negotiate with them and provide proper motivation. Offering to pay down the second lien balance can sometimes help convince them to subordinate.

Using Home Equity Loan Funds Responsibly

If you determine a third lien HELOC or home equity loan makes sense, use the funds wisely. Here are some smart ways to leverage your home’s equity:

• Pay off higher interest credit card, auto, or student loan debts
• Make home improvements that increase property value
• Consolidate other debts into lower monthly payment
• Cover emergency expenses or medical bills
• Pay for a child’s college education
• Start or invest in a small business venture

And some things to avoid:

• Luxury purchases like boats, RVs, or vacations
• Risky startup business ideas
• Covering everyday living expenses
• Gambling or speculative investing

A third lien tap into your home’s equity can provide accessible funds when you need them. But make sure you have a plan to pay off the debt on time and use the money responsibly. Careful borrowing against your home can unlock financial resources, while reckless borrowing can lead to financial disaster.

Key Takeaways on Third Lien Home Equity Loans

A few final points to summarize everything we’ve covered about third position home equity loans:

• It is possible but challenging – sufficient equity, strong credit, and low debt-to-income ratio required
• Underwriting scrutiny is high – it’s riskier for lenders than first or second lien
• Interest rates and fees will likely be higher than first/second lien alternatives
• Maximum loan amounts allowed are lower due to lower collateral security
• Second lien must agree to subordinate for third lien to have priority
• Weigh alternatives like refinancing or tapping available credit lines first
• Use home equity loan funds wisely for responsible purposes to improve financial position

While third lien home equity loans are an option, make sure you consider both the pros and cons carefully before moving forward. With proper planning and responsible borrowing, tapping your home equity can provide access to funds for major expenses while keeping monthly payments affordable.