What is a Second Trust Deed?
A second trust deed is a loan recorded against real estate when the property already has an existing loan or mortgage. Second trust deed loans let the borrower take out an additional loan against the property while keeping the existing mortgage on the property as well.
Second trust deed loans are higher risk for the second trust deed lender providing the loan and thus can be more challenging to obtain for the borrower. Second trust deeds are higher risk for the lender because if the borrower stops making payments on the first loan, the first lender can foreclose on the property. When the first lender forecloses it wipes out all other loans on the property. This would cause the second trust deed lender to lose their invested principal.
In order to prevent the first mortgage from foreclosing, the second trust deed lender would have to advance payments on the first mortgage to keep it current. This scenario requires the second trust deed lender to have cash on hand to prevent their second trust deed from being wiped out.
Because of increased risk in providing second deeds of trust, second trust deed loan rates are much higher than for a first position loan. Second trust deed loans also have a lower loan to value (LTV) limitation than first position loans. The lower loan to value helps reduce the risk to the second trust deed lender. The lower loan to value requires the borrower to maintain a higher amount of equity in their property.
Second Trust Deed Loan Rates
Second trust deed loan rates will vary greatly based on the loan scenario and the type of lender. Hard money lenders who provide second mortgages commonly provide rates in the range of 10-15% interest. Rates from a hard money lender for a second deed of trust in California will likely be lower than second trust deed loan rates in other states. California has many hard money lenders and the increased competition results in lower interest rates for second trust deed borrowers.
Conventional lenders providing home equity loans and home equity lines of credit will be able to offer the lowest second trust deed loan rates but they also require the most documentation and have the strictest qualification requirements. Conventional lenders loan rates are generally tied to the current prime rate and may adjust with the prime rate.
Who Provides Second Trust Deed Loans?
The most common providers of second trust deed loans are hard money lenders and conventional lenders such as banks and credit unions that provide home equity lines of credit (HELOC) or home equity loans.
Hard money lenders or private money lenders, can provide short-term loans that fund very quickly. Most hard money lenders can provide a hard money loan second mortgage against investment property for business use while fewer hard money lenders can provide a hard money second mortgage against a primary residence for consumer purpose.
What is a Hard Money 2nd Loan?
A hard money 2nd loan is a 2nd deed of trust funded by a hard money lender that is recorded against real estate behind an existing 1st mortgage. A hard money 2nd mortgage is similar to a HELOC or home equity loans but the source of the loan funds are private investors instead of large institutions. 2nd mortgage hard money lenders typically charge higher interest rates and the loan terms are shorter but they are able to fund much more quickly than conventional lenders. 2nd mortgage hard money lenders typically also have fewer requirements than conventional lenders and can overlook certain issues such as less than perfect credit scores.
What is a Private 2nd Mortgage?
A private 2nd mortgage is a loan recorded against real estate behind an existing 1st mortgage. The source of funds for private money 2nd mortgages are private money lenders who invest in trust deeds. Private second mortgage lenders are able to provide fast financing in situations when conventional lenders aren’t able to offer financing to the borrower. 2nd position private money lenders have fewer requirements than conventional lenders but they still need to verify income and ensure the borrower’s debt to income ratio remains below a certain level for consumer purpose loans. This is due to the current federal regulations that all lenders must comply with for consumer loans.