2nd Position Loans
What 2nd Position Loan is ?
A mortgage in the second position is one that is subordinate to the mortgage in the first position. Loans for second positions are sometimes for substantially lower sums. Loans for second positions are frequently in the $20,000–$50,000 range.
Secondary loans typically fall under one of two categories: gap financing or completing loans. When borrowers require funds to close a loan, gap finance is frequently sought for. In order to make it less probable that they will back out of the transaction, the primary lender will want the borrower to have some stake in the outcome. The borrower frequently looks for a second position loan to close when they don't have a capital partner.
Financing for the project's completion comes significantly later. The project has already begun, and money may be running low. You enter the game as a second position finishing loan. For instance, the renovation is almost finished, but to increase the property's worth, they may need to add a garage or other high-end finishing touches. The majority of the project is finished, but they still require a small amount more to complete it.
More risk can be involved with gap funding than in repaying loans. The project hasn't even begun with a gap financing. You must take the borrower's track record into account at this early stage of the game. What is their track record with similar remodeling initiatives? What is the history of their credit? Do they owe anyone anything? Do they pay their payments on time? You will need to do additional research before deciding to take out a gap loan.
Since a finishing loan is much later in the project, there can be less risk. You can inspect the property; you can stop by and see exactly what they have done and how close they are to actually finishing the home. You can speak with their broker to get their opinions regarding how the property compares to similar properties in the area. Due diligence is still required, you just have to consider other factors – including whether the primary lien holder is still being paid and how much “room” is left in the project. Meaning the difference between the expected sales price and the total amount of expenses on the project.