2nd Trust Deeds

1st and 2nd trust deeds are types of mortgages used by real estate investors, business owners, and homeowners to borrow against equity in a property. 

The vast majority of 1st trust deeds are in the form of 30-year fixed-rate mortgages, provided by banks and credit unions. 

While the bulk of Second trust deeds have terms of 6 to 24 months, and are most commonly funded by hard money lenders.

2nd trust deeds can be interchangeably referred to as 2nd liens, 2nd mortgages, second-position loans, 2nd deed of trust, or junior liens.

A second lien is a junior lien against a property with an already existing first-position mortgage, making the 2nd lien subordinate in repayment priority.

Therefore, borrowers can take out an additional second mortgage loan against a property, while simultaneously leaving the existing first mortgage in place and unaffected.

Banks tend to avoid funding 2nd liens because they have a greater chance of losses if the borrower defaults.

Hard money lenders fill this gap in funding, but charge higher interest rates to compensate for the greater risk of default.

Since banks rarely approve second mortgages, California real estate owners often turn to 2nd lien hard money lenders for liquidity needs.

Funds provided by 2nd trust deeds are used by borrowers for all types of purposes, including renovations, purchases, or working capital for a business. 

Familiarize yourself with common second trust deed loan terms to have a better understanding of what you are getting yourself into.

While some of the terms such as loan amount or interest rates are fairly self explanatory, others might be foreign to you.

Here is a cheat sheet for California 2nd trust deed hard money loan terms:

Combined Loan-to-Value (CLTV)

• (1st mortgage amount + 2nd mortgage amount) / property value
• Normally restricted to 60% to 65%, but could be higher depending on lender

Terms

• Refers to the duration of the loan, usually 6 to 24 months

Subordination Agreement 

• Establishes priority of liens, with the 1st trust deed in senior position over the 2nd trust deed in junior position

Pre-payment Penalties

• Vary lender to lender, but normally 3 to 6 months

Cross Collateralizing Properties

• Using multiple properties as security for one loan, often seen when a borrower lacks sufficient equity in a single property

Credit Requirements

• Some hard money lenders may require a minimum credit score but this can be overlooked if equity is strong

Default Interest Rate 

• A higher rate kicks in if the borrower misses payments or does not adhere to loan terms

Balloon Payment 

• A lump-sum payment due at the end of the loan term, since the majority of hard money money payments are interest-only

Personal Guarantee 

• Personal guarantee from the borrower allowing for personal assets to be used for repayment, if the property collateral isn’t sufficient. 

Here are a few common scenarios of how a California second lien hard money loan might be used, highlighting the risks and rewards.

1. Real Estate Bridge Loan

An investor owns an apartment complex in Los Angeles with a small first mortgage. 

They found a great deal on a fix-and-flip home for sale in Santa Barbara.

Knowing the property will sell quickly, the investor doesn’t have time to wait for a lengthy bank loan, they turn to a hard money lender who can provide funding in less than a week.

The investor taps into the available equity available in the Los Angeles apartment complex using a 2nd trust deed loan from a hard money lender. They use those funds for either a downpayment or to purchase the Santa Barbara property.

They borrow a second trust deed hard money loan at 12% for 1 year, accessing a combined LTV of 60%. Obtaining the second trust deed leaves the first-position bank mortgage in place and unaffected.

Once the Santa Barbara property is secured, the investor performs a fix-&-flip, holding the property for 6 to 9 months and reselling it for a handsome profit.

Risks can occur if renovations takes longer than expected or property prices decline If the borrower struggles to pay off the second lien when due, it could result in higher refinance rates or default.

1. Cash-Out for Business Expenditures

A successful small business owner owns a $1,500,000 mixed-use retail property in Irvine with a bank loan balance of $500,000. 

They borrow a 2nd trust deed hard money loan of $250,000 for 24 months and at an 11% interest rate, bringing the CLTV to 50%.

The fresh capital is used for the expansion of a new location.

Since the equity is strong, the lender is comfortable with the loan.

This can be risky if the business expansion doesn’t go as planned, in which case the borrower might expose the mixed-use retail property to default.

We are hard money lenders based out of Los Angeles, California, specializing in 2nd trust deeds for business owners, homeowners, and real estate investors. 

With over two decades of combined experience, we’ve helped countless borrowers procure fast funding for 2nd trust deed loans for various types of properties and investment scenarios. 

Whether you need a cash-out refinance loan for a down payment on a commercial property in The Bay Area or a bridge loan for relocation of a multi-family building in San Diego, Crescent Lenders delivers 2nd lien financing for a diverse range of borrowers.

Since banks are often hesitant to grant a 2nd position mortgage against a property, Crescent Lenders uses a much simpler lending criterion, the most important factor being the value of the property and the combined-loan-to-value ratio of the 1st and 2nd loans.

We deliver when big banks say no.