The Ultimate Guide to 2nd Trust Deed Loans in California

A 2nd lien loan is a hard money loan secured by a real estate with an already existing first mortgage. 

This second trust deed sits in junior position behind the first lien, therefore giving the first lien repayment priority if the property were to be sold in foreclosure. This means the first lender gets paid first, and the second lender is paid from the remaining proceeds.

Due to the secondary position, 2nd lien loans are higher risk for lenders, but also offer higher interest rates for private money investors.

Property owners often use these loans with equity in their property but want to avoid refinancing their first mortgage, usually because they have a favorable, low-interest rate locked in for the next 20 to 30 years. Borrowers commonly use second liens for renovations, business expansion, or to acquire additional investment properties.

In most cases, a borrower can obtain a second trust deed without permission from the first-position lender. However, some loan agreements include clauses that prohibit or require approval for any additional liens.

While both banks and 2nd lien hard money lenders provide this powerful financial instrument, most 2nd trust deed loans are funded by hard money lenders.

Hard Money Lenders: 

• Made up of wealthy individuals and small companies
• Fast approval, funding can be obtained in less than a week
• Asset-based lending approach 
• Customize terms to fit the borrower’s needs

Banks:

• Hesitant to provide borrowers with second-position loans
• More likely to offer HELOCs than 2nd trust deed loans 
• Slow and strict approval process

Selecting a hard money lender is not like choosing between a pair of sneakers; it’s a decision with serious financial consequences. 

A good lender should act like a mentor and be there for you if issues arise. 

Hard money loan fees can total in the thousands or even tens of thousands, therefore it’s important to shop around, ensuring you a reputable and proven lender.

Don’t just go with the first hard money lender you find; instead, shop lenders.

Factors to Consider

• Interest rates 
• Origination points 
• Underwriting fees
• Well reviewed online
• Are they a direct hard money lender, not a broker
• Max combined loan-to-value offered
• Average closing time 
• Loan terms
• Pre-payment penalties
• Flexibility in the use of funds
• What documentation is needed? Are credit & cash reserves important

Plan for worst-case scenarios

• What if the real estate market experiences a drastic decline in value? 
• What if bank refinancing interest rates rise? 
• What if renovations or permits are delayed? 
• Model downside scenarios and make sure you have a backup plan
• Make sure the deed of trust and promissory note are properly recorded
• Understand how the lender handles defaults & foreclosures

Get all agreed-upon terms in writing to help avoid confusion down the line.

Second lien loans can be harder to qualify for, but are a practical solution when a borrower has significant equity in a property and doesn’t want to refinance an existing first mortgage. 

2nd trust deeds have become increasingly more common and popular as interest rates have risen, and 1st position 30-year mortgages, with rock bottom interest rates, are too valuable to give up.

Here are some common scenarios where using a 2nd trust deed makes sense:

• Tap into Equity: Pull cash out for renovations, business expenses, or other needs.
• Preserving your 1st Mortgage Rate: A 2nd trust deed allows you to keep your favorable first-lien loan unaffected.
• Bridge Lending: Provide temporary funding until a sale or refinance is finalized.
• Property Acquisition: Using equity to secure additional real estate acquisitions.

At Crescent Lenders, we review each deal individually and focus on collateral value, borrower strategy, and exit plan, not just credit scores or bank documentation.

Let's explore a case study of a recent transaction funded by Crescent Lenders.