2nd Position Hard Money Loans
2nd mortgage hard money lenders (private money lenders) are able to provide 2nd position hard money loans to property owners who currently have sufficient equity in their property. In these types of situations, the property owner typically has a low-interest 1st mortgage they want to keep in place but they need to pull equity from the property quickly. The borrower is often looking to use the 2nd position hard money loan to take advantage of an investment opportunity or solve an issue they are dealing with. 2nd position hard money loans are only intended to be a short-term solution and the borrower needs to have a long-term plan. The private 2nd mortgage allows the borrower to keep the long-term loan in place and still borrow against the equity in the property.
A hard money 2nd mortgage is requested in order to borrow against existing equity in a borrower’s real estate. 2nd mortgage hard money lenders provide funding much more quickly and with far fewer regulations than traditional lenders. Borrowers typically decide to obtain a hard money 2nd loan because they have a need for fast funding or they can’t currently obtain a 2nd loan from a traditional lender.
- “Hard money” refers to the source of the funds that are being borrowed. Hard money or private money loans come from private investors as opposed to traditional lending institutions such as banks and credit unions.
- “2nd” refers to the position of the loan recorded against the real estate. If the property already has an existing loan against the property (1st) any subsequently recorded loan against the property will be in 2nd or junior position.
What is a Second Trust Deed?
A second trust deed is a loan or mortgage recorded against real estate behind an existing loan (first). A second trust deed is also known as a junior lien. The timing of the recording of the loans against the property determines the priority (first recorded loan is senior). A hard money second mortgage, home equity line of credit or home equity loan are the most common examples of second trust deeds.
Second trust deed loans are more difficult to obtain as it a riskier loan for the second trust deed lender. If the borrower stops making payments on the loan against the property, the lender in first position can foreclose on the property which would wipe out any other loans (second trust deeds) recorded after the first mortgage was recorded. The second trust deed lender could lose their entire investment. The second trust deed lender would be able make payments on the first mortgage to keep it current and then foreclose on the defaulting borrower from second position. This requires the lender to have a sufficient amount of cash available to save their second position loan.
Due to the increased risk in this type of situation, second trust deed loan rates are higher than for a loan in first position. Second trust deed loans also typically have a lower loan to value limitation compared to first loans. This is an attempt to reduce the amount of risk for the second trust deed lender by requiring the borrower to keep a certain amount of equity in the property.
READ MORE: What is a Second Trust Deed?
2nd Mortgage Hard Money Loans for Bad Credit
2nd mortgage hard money loans can be obtained for borrowers with less than perfect credit and other issues. Hard money lenders who provide 2nd position loans are typically able to overlook issues on a borrower’s record such as bad credit, short sales, loan modifications, bankruptcies, and foreclosures. As long as the real estate serving as collateral has sufficient equity relative to the requested loan amount, the 2nd trust deed lender can still consider providing the loan. If the 2nd loan would be considered consumer purpose, the borrower will need to prove their income and qualify based on their debt to income ratio. This is required due to current federal regulations which even 2nd mortgage hard money lenders must comply with.
In some instances a 2nd mortgage hard money loan can expedite the repairing of the borrower’s credit scores when used for debt consolidation. When used as a debt consolidation loan, the hard money 2nd can be used to refinance high-interest debt (20%+) down to a more reasonable interest rate. Interest rates for secured debt (loan against real estate) are typically going to be less expensive than unsecured debt (credit cards).
2nd Trust Deed Loan Rates
Hard money 2nd trust deed loans rates will be higher than interest rates for a 1st due to the increased risk to the lender. A 2nd behind a large 1st presents a great deal of risk to the lender of the 2nd. If the borrower does not make payments on the 1st loan, the lender of the 1st may foreclose on the borrower at which point the lender of the 2nd will have their loan wiped out. The extra risk for the lender in 2nd position is the reason for the higher interest rate.
Expect interest rates for California 2nd trust deeds to be in the range of 10-13%. The rate will depend on various factors including the specific lender, strength of the borrower, CLTV being requested and property location.
Hard Money 2nd Business Purpose Loans vs. Consumer Purpose Loans
The majority of 2nd mortgage hard money lenders are only able to provide business purpose hard money loans. North Coast Financial is able to provide both business purpose (2nd position commercial loans) and consumer purpose hard money loans.
If the majority of the borrowed funds will be used for business purpose (investing in or starting a business, purchasing investment real estate properties) the loan will be considered business purpose. If the majority of the borrowed funds will be used for consumer purpose (remodeling primary residence, personal debt consolidation, purchasing a boat or RV) the loan will be considered consumer purpose.
Hard Money 2nd Loan – Investment Property vs. Primary Residence
The type of real estate used as collateral for the 2nd mortgage does not determine whether the loan is considered business purpose or consumer purpose. A 2nd mortgage against a commercial property to pay off personal credit cards would be consumer purpose loan. A 2nd mortgage against a primary residence to purchase equipment for a business would be a business purpose loan.