Banks determine first and second mortgages based on creditworthiness, property value, and loan-to-value (LTV) ratios. For first mortgages, lenders assess credit scores, income stability, debt-to-income (DTI) ratios (typically ≤43%), and the property’s appraised value. Second mortgages, or HELOCs, rely on remaining equity after the first mortgage and similar financial criteria but often require higher equity (e.g., ≥20%) and stricter DTI limits.

Banks prioritize first mortgages because they have first claim on the collateral, reducing risk. Second mortgages are riskier due to subordinate lien status, so lenders charge higher interest rates (e.g., HELOCs average 5.5–8.5% vs. 4.5–7.5% for first mortgages). Data from the Consumer Financial Protection Bureau (2022) shows 72% of HELOC approvals require DTI ratios ≤43%, mirroring first-mortgage standards. However, LTV limits for HELOCs are stricter (e.g., ≤80% combined LTV), as seen in FHA guidelines. A 2023 Federal Reserve report noted that 65% of second mortgages are used for debt consolidation, reflecting banks’ focus on stable equity and predictable repayment. Lenders also consider property type (e.g., single-family homes vs. investment properties) and local market trends, as higher home values in urban areas justify larger LTV ratios. Ultimately, second mortgages depend on both the borrower’s ability to repay and the property’s remaining equity, making them contingent on the first mortgage’s terms.