As was very common during the high point of the real estate market in recent years, hard money lenders will sometimes agree to make what is called a “junior lien.” A lien that is in second position or subordinate to a first lien is a type of junior lien, as is any lien that is further down the line – such as a third or fourth lien.

What this means is that your right to collect against the collateral that you have secured is subject to all senior lien holders (usually the first lien holder) collecting all of their unpaid balance, accrued interest and fees first. Needless to say, this can equate to an extremely risky situation even if your loan-to-value is low. It’s possible that you could end up in a situation where you are required to payoff the first lien or reinstate the first lien. In other words, the borrower’s burden could become your burden. In the worst case scenario, an event of default wipes out your second mortgage completely because the market has declined.

A good question to ask yourself when considering a junior lien is: “If the borrower defaults, would I want to buy the property for the cumulative balance of both liens? And if so, do I have the resources?” If the answer is ever no, it would likely be wise to walk away and wait for the next deal.