When an entity holds a legal interest in real estate, the interest will be recorded and listed on the title report as a lien. Such a legal interest means the holder has some right to the property and the property cannot be transferred until that interest is settled or otherwise released.

For real estate investors,how second liens work the most common lien is a lender who has issued a loan and recorded the lien. But there can be other liens as well such as a mechanic’s or contractor’s lien while work is being performed on the property.

The property owner can have a second lien such as a home improvement loan or a second used to help finance the initial purchase. Real estate investors can also provide financing for others and issue a first or second mortgage depending upon the needs of the buyers. But how do second liens work and what exactly does “second” really mean?

 A second mortgage is one that is subordinate to the first. Whenever a property is sold, the liens must be settled and the first mortgage will be paid off before the second one will. The first mortgage is in a so-called “superior” position. Second lien rates are higher than first liens in major part to offset additional risk for being in a subordinate position.

For instance, a rental property sells for $100,000 and there is a first mortgage of $95,000 and a second of $10,000.  Unless the second lien gets paid, the lien cannot be released and the sale can’t take place. Further, should the mortgage that goes into default with a second lien behind it, the second lien lender could be wiped out completely if the first lienholder forecloses. A second lien can foreclose in the same manner as a first lien lender but the first lien lender will be settled first, regardless of who initiated foreclosure action.