Using Home Equity to Secure a Loan from a Private Lender?

[Gustave Stroes]

Hello - I have a private lender who is willing to lend us money to finish our current construction project. We have quite a bit of equity in a rental property, and he would like to use that as "secured property" for the loan. How does one go about this? 

The loan is for up to $400k, in increments of $100k, with 2 points, no interest. The loan will mostly be needed for about 3 months as a bridge between when we get billed by subs and when we get reimbursed by our regular construction loan.

The equity-home mortgage stands at $400k and the house is probably valued around $2M in today's market.

I've used Legalzoom to obtain and fill out a Promissory Note and Security Agreement. But my issue is that the "secured property" has a first lien (the mortgage). So really if we did default how could he use the equity in the home to get his money back? I do not see that clearly spelled out in the Security Agreement, but maybe it is implied?

Any input would be appreciated.

[Account Closed]

Originally posted by @Kyle Gadberry:

The 2nd won't get their money until you sell the home. Also, the 2nd may try to foreclose but they can't foreclose without permission from the 1st lender. As long as you're making payments on the 1st, they won't foreclose.

 This is not correct.  The 2nd does not need permission from anybody to foreclose.  If borrower defaults on the 2nd (or 1st for that matter) the 2nd can foreclose.  Proceeds from the trustee sale will go to payoff the 2nd and if there is any remaining the balance will go to the now former property owner.  The 1st remains solidly in place.  The 1st can at its discretion foreclose based on the due-on-sale clause or it can continue to accept payments from the new property owner.