What is a Business Purpose Hard Money Second Mortgage?

A business purpose hard money second mortgage is a type of loan issued by nonbank private lenders, including individual trust deed investors, family offices, and private mortgage funds or debt funds. These loans are issued to real estate investors, house flippers, home builders, or business owners who need a short-term bridge loan secured against their real estate property. 

Understanding Business Purpose Hard Money Second Mortgages

Let’s break down each aspect of a business purpose hard money second mortgage. 

Business Purpose

This specifies that the loan is being used for commercial, rather than personal, purposes. Purchasing commercial property, investing in real estate, or providing working capital for a business are all examples of commercial purposes.

Hard Money Loan 

Hard money is typically issued by private lenders, not banks or credit unions, and is usually backed by the value of the property, not the borrower's creditworthiness. However, hard money lenders and private money lenders (basically the same thing), will review credit and income to make sure the borrower has a high likelihood of repaying the loan. These loans are generally short-term (usually around 12 months), have higher interest rates than traditional loans (9.00% to 13.00%), and feature interest-only payments with a balloon payment at the end of the term. Hard money loans are often used to close quickly, buy a vacant property that doesn’t qualify for bank financing, or for a fix-and-flip project, when a borrower expects to resell or refinance a property shortly after acquisition.

Second Mortgage

A second mortgage refers to a loan that is subordinate to a primary (or first) mortgage. It uses the same property as collateral, but is second in line to be repaid if the borrower defaults and the property is sold. As a result, second mortgages usually carry higher interest rates than first mortgages to reflect this increased risk.

Examples of Business Purpose Hard Money Second Mortgages

Below are a few examples of business purpose hard money second mortgages. 

Second Mortgage on Commercial Building

A business owner took out a short-term business purpose hard money second mortgage secured by their office building, which they planned on selling. The operating capital provided funds for a new facility where the business will operate in the years to come. 

$500,000 Second Trust Deed Secured by San Francisco Vacation Rental 

The owner of a successful vacation rental in San Francisco took out a $500,000 hard money second mortgage to use for down payment funds on their next vacation rental acquisition a few blocks away. 

$700,000 Hard Money Second Mortgage Secured by Owner-User Warehouse

FCTD provided a $700,000 private second mortgage to the owner of a large industrial warehouse in Southern California. The cash-out proceeds went to finance a large purchase for their wholesaling business. The loan was paid off within 10 months when the owner refinanced the first and second mortgages into a new SBA first mortgage. 

Conclusion

A business purpose hard money second mortgage is a loan used for commercial purposes, issued by private lenders primarily based on the value of the property, and is subordinate to an existing mortgage on the same property. It's mainly for scenarios where the borrower needs to quickly secure financing, usually with a plan to resell or refinance the property in the near term.