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What is a Second Trust Deed?

Written by Posted On Wednesday, 03 March 2021 17:10

What is a Second Trust Deed?

Second trust deeds are loans secured against a property when the real estate already has an existing recorded loan. A second trust deed loan allows a borrower to pull equity from the property and leave the existing first loan on the property. This is especially beneficial when the borrower’s interest rate on the first loan is below current market rates.

Who Provides Second Trust Deed Loans?

Common providers of second trust deed loans include hard money lenders (private money lenders) and traditional lenders such as credit unions and banks who lend for home equity loans and home equity lines of credit (HELOC).

Private money lender or hard money lenders, provide fast financing but usually only for shorter terms (1-5 years). Many hard money lenders provide hard money loan second mortgages for business purpose against investment property. A smaller amount of hard money lenders are able to fund hard money second mortgages secured by a primary residence for a consumer purpose use.

Second Trust Deed Loan Risks

Second trust deed loans are riskier for second trust deed lenders which results in higher interest rates. Second trust deeds create additional risk for the second lender as the lender can lose their principal if the borrower defaults on the first loan. The first lender can foreclose on the property which would wipe out any other junior loans recorded against the real estate.

To prevent the first loan holder from foreclosing on the property, the second trust deed lender would need to make the borrower’s payments and keep the first mortgage current. The second trust deed lender would need to have cash to make the payments on the first mortgage to prevent the second trust deed from being wiped out with a foreclosure.

Second Trust Deed Loan Rates

Due to the increased risk, second trust deed loan rates will be much higher than first position loans. It is also common for second trust deed loans to have lower loan to value (LTV) ratio limitations than what is available for first position mortgages. A lower loan to value reduces risk for the second trust deed lender as the lower loan to value ensures the borrower maintains a higher amount of equity in the real estate.

Second trust deed loan rates can vary significantly based on the type of lender and the specific loan scenario. Hard money lenders who fund second mortgages often have interest rates in the range of 10-15%.

Interest rates can also vary based on the geographic location of the real estate. For example, hard money lender rates for a second trust deed in California are likely be lower than second trust deed loan rates in other parts of the country. The large amount of hard money lenders in California creates increased competition and results in lower interest rates for second trust deeds.

Traditional lenders such as banks and credit unions who provide home equity loans and home equity lines of credit offer the best second trust deed loan rates. These types of lenders also take the longer to fund, require additional documentation and have strict qualification guidelines. Conventional lender second trust deed loan rates are often tied to the prime rate and may adjust.

What are Private 2nd Mortgages?

Private 2nd mortgages are loans secured against property that already has an existing 1st loan. Private money 2nd mortgages are funded by private investors who invest in private trust deeds. The main benefits of receiving funding from private second mortgage lenders are that they can provide quick financing and lend in situations that conventional lenders cannot.

2nd position private money lenders do not have the same strict requirements as conventional lenders but are still required to verify the borrower’s income and make sure the borrower’s debt to income ratio is acceptable on consumer purpose loans. This is required by the current federal regulations that all lenders must follow on consumer loans (personal, family, household use).

What are Hard money 2nd Loans?

Hard money 2nd loans are 2nd deeds of trust that are financed by hard money lenders. It is considered a 2nd loan because is recorded against a property with an existing 1st mortgage. Hard money 2nd mortgages are somewhat similar to a HELOC or a home equity loan but different as the source the funding is private investors as opposed to big institutions. Hard money loans can fund much more quickly than a conventional bank loan.

Interest rates from 2nd mortgage hard money lenders are typically higher and the loan lengths are often only short-term. 2nd mortgage hard money lenders generally have fewer requirements than conventional lenders and can fund loans for borrowers with less than perfect credit.

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Jeff Hensel

North Coast Financial, Inc. is a California hard money lender with over 37 years of experience specializing in various types of hard money loans including probate and estate loans, investment and rental property loans, bridge loans, fix and flip/rehab loans, purchase loans, cash out and refinance loans and other hard money loans with California real estate as collateral.

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