What is a Hard Money Second Mortgage?

A hard money second mortgage is a junior lien secured by real estate and usually issued by a private lender rather than a bank or conventional lender. The “second” means that the mortgage is subordinate to the senior lien encumbering the property, also called the “first” mortgage. If the borrower defaults on the first or second mortgage and the property is sold through foreclosure auction, the first mortgage is repaid before the second. 

Hard Money and Private Money Second Mortgages

Hard money loans get their name from the hard asset — real estate — that is collateral for the loan. Hard money lenders traditionally use the asset value to determine the loan amount. Lenders prefer to have a certain amount of protective equity, or the amount between the hard money loan amount and the property value. This protects the lender’s lien if the borrower defaults and the lender has to foreclose on the property to retrieve their funds. 

Private money loans, on the other hand, are hard money loans but with more underwriting requirements and due diligence performed by the mortgage broker and private lender. A private money loan factors the borrower’s credit, background, bank statements, subject property's rent roll, use of funds, exit strategy and more. Most of the hard money second mortgages we originate at FCTD are private money loans. As mortgage brokers, we carefully assess the details to ensure the borrower has a high probability of repaying the loan.  

People use hard money and private money loans interchangeably. As I said in this article about the difference between hard money and private money, it’s mostly semantics. We’re talking about the same thing when we say hard money or private money. The loan looks the same. A private money loan, however, requires just a few more steps upfront to get to the finish line.  

Hard Money Second Mortgage Lenders 

FCTD works with a diverse group of hard money and private money second mortgage funding sources to place loans for our real estate investor clients. Our private lender network consists of the following categories: 

1. Individual trust deed investors

   FCTD has developed long-term relationships with several high-net-worth individuals with backgrounds in finance, real estate, law and entertainment who lend money against real estate. 

2. Real estate offices with a private lending division

   There are many real estate investors that also invest in trust deeds and hard money loans. 

3. Family offices

   Similar to real estate offices, family offices may manage several businesses and real estate investments, in addition to mortgage lending. 

4. Debt funds

   A debt fund (or mortgage fund) is a mortgage lender managed by a general partner (GP). Limited partners (LPs) supply capital for the fund. The GP makes the underwriting decisions and manages all the fund details for the LPs, who in turn receive returns on their investments. 

5. Lenders that originate and sell

   Also known as conduit lenders, these investors issue a loan then immediately sell or assign the loan to an institutional investor, an individual, or multiple individuals investing in a fractional trust deed. 

The lender determines the level of due diligence the borrower will need to provide during the underwriting phase. 

Features of Hard Money Second Mortgages

Here are some key features of hard money second mortgages:

• Higher Interest Rates

  Hard money lenders charge higher interest rates because the loans aren't bank eligible. Higher risk means higher interest rates.

• Higher Closing Costs

  Second mortgages often have higher fees than first mortgages.

• Shorter Terms

  Most hard money second mortgages have a term of 6-36 months.

• Interest-Only Payments

  Most hard money loans have interest-only payments with a balloon payment due at maturity. 

• Equity-Based

  In theory, hard money loans are equity-based. However, most of the hard money second mortgages FCTD originates are actually considered private money second mortgages. We take into consideration the protective equity in the collateral while also factoring the borrower’s credit, capacity and character. 

• Faster Approval

  Some hard money second mortgages can close in as few as 48 hours. However, a safe timeline to work with is 10-14 days. 

• Combined Loan-to-Value (CLTV) Ratios

  Lenders will look at the combined loan-to-value (CLTV) ratio, which is the first mortgage plus second mortgage, divided by the property value. Most hard money second mortgages stick to 65-70% CLTV. 
  
  

I’ll cover many additional aspects of hard money second mortgages, including an extensive guide, “Hard Money Second Mortgages: What You Need to Know!” There I'll dive into the details of hard money second mortgages, and answer several of the most common questions and loan scenarios that I've received over the past few years.