First-Lien Position: The Most Important Two Words in Private Lending
First lien, second lien, mezzanine, preferred equity: the order of repayment decides what happens to your money when a deal fails. With a worked loss example.
Same property, same default, two very different outcomes
One house. One borrower. One default. Two lenders with very different mornings.
Illustrative only. Figures are assumed for the example and are not a representation of any actual loan or outcome.
The setup:
| Item | Amount |
|---|---|
| Appraised value when the loans were made | $400,000 |
| First-lien loan (65% LTV) | $260,000 |
| Second-lien loan | $90,000 |
| Total debt | $350,000 |
| Borrower's equity at origination | $50,000 |
Eighteen months later the borrower stops paying. The property is worth less than it was, the renovation is unfinished, and it sells at foreclosure for $310,000.
Here is the waterfall.
| Step | Amount | Running balance |
|---|---|---|
| Foreclosure sale proceeds | $310,000 | $310,000 |
| Less: delinquent property taxes (assumed) | ($8,000) | $302,000 |
| Less: costs of sale, legal, securing and carrying the property (assumed) | ($22,000) | $280,000 |
| To the first lien: $260,000 principal plus $18,000 accrued interest and advances (assumed) | ($278,000) | $2,000 |
| To the second lien: owed $90,000, receives what is left | ($2,000) | $0 |
| To the borrower | $0 | $0 |
The result, in one line each:
First lien. Recovers $278,000 against $278,000 owed. Whole, after eighteen months of work and worry.
Second lien. Recovers $2,000 against $90,000 owed. A loss of $88,000, or 98% of principal.
Borrower. Loses the $50,000 of equity entirely.
Same property. Same default. Same sale price. The difference between a full recovery and near-total loss was the order of recording.
Now change one number. If the property had sold for $270,000 instead of $310,000, the first lien would have received $240,000 against $278,000 owed and taken a $38,000 loss of its own. Priority determines who absorbs loss first. It does not determine whether there is any loss to absorb.
What a lien actually is
A lien is a recorded claim against a specific property, filed in the county's public records. It is not the agreement between you and the borrower; the note is that. The lien is notice to the rest of the world that the property secures a debt, and it is what lets you force a sale if the debt goes unpaid.
Priority is generally determined by recording order, first in time, first in right, subject to the exceptions below. The sequence and timing of what gets filed at closing is not clerical work. It is the asset.
This is why the title commitment and the lender's title policy matter more than anything the borrower says about themselves. The search identifies what is already recorded: existing mortgages, judgment liens, tax liens, easements, unreleased liens from a loan paid off years ago. The commitment lists what must be cleared before closing. At funding, prior liens are paid and released and the new deed of trust is recorded. The policy then insures the validity and priority of your lien up to the policy amount, so an underwriter's balance sheet stands behind the position rather than your diligence alone.
Why second-position lending pays more
Because it should. Second-position and mezzanine lenders charge materially more than senior lenders, and the premium is not free money. It is compensation for standing behind the first lien in the exact waterfall above.
Look at what the second lienholder above was exposed to. Their loan sat between $260,000 and $350,000 of value on a $400,000 property, the slice from 65% to 87.5% LTV. A 22.5% decline plus the costs of enforcement wiped out effectively all of it. The first lien's slice, from zero to 65%, survived.
That is the trade: higher stated yield, first loss position, and a recovery in a bad outcome that is often close to zero rather than partial. Some lenders are properly paid for it and know exactly what they own. Many investors in second-position paper have simply been quoted a bigger number. A junior lienholder can defend itself by curing the senior loan and taking over the project, but that takes cash and appetite on short notice, and it generally cannot control when the senior forecloses.
The equity cushion
Lien position tells you where you stand in the queue. Loan-to-value tells you how much protection stands in front of you. You need both.
The borrower's own money is the buffer. At 65% LTV, there is 35% of value below the loan before a dollar of the lender's principal is at risk, in theory. In practice that cushion is thinner than the percentage suggests, because a foreclosure recovery is not the appraised value.
Illustrative only. Assumed costs, not a representation of any actual outcome.
| Starting LTV on a $400,000 property | Loan amount | Value decline that begins to touch principal, after roughly 10% of combined costs of sale and enforcement |
|---|---|---|
| 55% | $220,000 | about 39% |
| 65% | $260,000 | about 28% |
| 75% | $300,000 | about 17% |
| 85% | $340,000 | about 6% |
That table is the argument for conservative advance rates, stated more honestly than "we are conservative". Every ten points of LTV takes roughly ten points off the decline the loan can absorb, and costs eat the rest.
It is also why advance rates should vary by collateral type. Our own portfolio target is a 65 to 75% weighted loan-to-value with an 85% maximum, set by type: single family non-owner-occupied at a 75% target and 85% maximum, multi-family at 65 and 70, commercial at 65 and 75, ground-up construction on an as-completed basis at 75 and 80, and entitled raw land at 55 and 65. Land carries the lowest advance because it produces no income and sells slowly under pressure.
What can jump ahead of you
First position is a position relative to other voluntary liens. Several claims can rank ahead of a recorded first lien regardless of when they arose, and experienced Texas readers will check whether an article mentions them.
Property taxes. Unpaid ad valorem property taxes generally hold priority over a previously recorded deed of trust. Under Texas Tax Code § 32.05(b), a tax lien outranks every other lien on the property, including a mortgage or deed of trust recorded before the tax lien attached — priority runs to the tax collector regardless of filing order. That is why a lender tracks tax status through the life of a loan and why unpaid taxes are an event of default in a well-drafted note.
Mechanic's and materialman's liens. Particularly dangerous for a construction lender in Texas, because under Texas Property Code § 53.124 a mechanic's lien's priority relates back to the commencement of construction or delivery of materials — visible on the land itself — rather than to the date the lien affidavit is filed. A contractor who started work before your deed of trust was recorded may rank ahead of you even though their lien is filed later.
Homeowner association assessments. Under Texas Property Code § 82.113, an HOA or condominium assessment lien is generally subordinate to a first mortgage or deed of trust recorded before the assessment became delinquent. Some declarations carry a limited "super-lien" for a capped number of months of assessments that can prime even a first mortgage, so the recorded declaration is worth reading, not assumed.
Federal tax liens. IRS liens follow federal rules on priority, notice and the post-sale redemption period. Where a Notice of Federal Tax Lien was filed more than 30 days before a non-judicial sale, the foreclosing lender must give the IRS separate notice of the sale; if that notice isn't given, the sale does not clear the federal lien. Even when notice is properly given, the government keeps a 120-day right to redeem the property after the sale (or longer, if state law allows more).
None of these make first-lien lending unworkable. They make lien tracking part of the job.
How a fund protects priority
The controls are unglamorous and they are the actual work.
Title commitment reviewed before closing, not at it. Every exception read and every unreleased instrument chased down while there is still time to fix it.
Prior liens paid and released at funding, disbursed through a title company against a settlement statement so payoffs happen simultaneously with recording.
A lender's title policy in the fund's name, in the right amount with the right endorsements for the loan type.
Tax status monitored through the loan, not just at closing, because taxes accrue whether or not anyone is watching.
Lien waivers collected with construction draws, so paid contractors cannot later record a lien that primes the loan.
Insurance tracked with the lender named for notice, so a lapse produces a call.
What first lien does not protect you from
The honest list, because the section above reads like a promise and it is not one.
A collateral value collapse. If values fall far enough the cushion is gone, and priority merely sets the order in which people lose money. First lien means you lose last, not that you do not lose.
A fraudulent borrower. Forged documents, undisclosed liens, a contractor never paid, insurance cancelled the week after closing. Title insurance covers some of that and not all of it, and recovery can take years.
A property that got worse. A half-finished renovation with an open roof is worth less than the same house untouched, and the lender usually pays to stop the bleeding.
A slow process. Texas is faster than most states because foreclosure is non-judicial. It is still not instant, and a bankruptcy filing stops it.
A deficiency you cannot collect. A claim against a guarantor with no assets is not money.
In our own lending record, which is the manager's record and not audited fund performance, 60 Texas loans have been funded since October 2019 totalling $13.3 million of principal. Fifty-five repaid on schedule. Five required a workout, four foreclosures and one deed in lieu. Three of those five returned principal in full and two did not. Total principal lost across all 60 loans is under $50,000, less than 0.4% of principal funded. First-lien position at a conservative loan-to-value is why most of those workouts ended in a delay rather than a loss. The two that did not are why we describe it as protection rather than certainty.
Frequently asked questions
Q: What is first lien position?
A: First-lien position means the lender holds the senior recorded claim against a property and is repaid in full from a foreclosure sale before any junior lienholder or the owner receives anything. Priority is generally established by recording order, confirmed by a title search and insured by a lender's title policy. It does not eliminate loss; it determines who absorbs loss first, and the first lien is last in that queue.
Q: What is the difference between a first and second lien?
A: Order of payment. The first lien is repaid in full from sale proceeds before the second lien receives a dollar, so the second lienholder absorbs loss first and can be wiped out entirely while the first is made whole. Second-position lenders charge more to compensate for that, and the gap between the two rates is a rough market price for the extra risk.
Q: Can a first lien holder lose money in a foreclosure?
A: Yes. A first lien caps the number of people ahead of you; it does not guarantee the collateral is worth the balance. If values fall, if the property was damaged or left unfinished, if unpaid taxes and costs of sale are large, or if the original loan-to-value was too aggressive, net proceeds can fall short of principal plus accrued interest and advances. A deficiency claim against the borrower is often uncollectable.
Q: What liens come before a first mortgage?
A: Unpaid property taxes generally take priority over a recorded mortgage or deed of trust. Certain assessments and homeowner association claims can also rank ahead depending on state law and the recorded declaration. Mechanic's and materialman's liens can prime a lender in some circumstances because priority may relate back to when work began rather than when the lien was filed. Federal tax liens and some government claims follow their own rules.
The investor package includes the full lien and title checklist we use at closing, along with the fund documents. Download it and check our process against the one described here.
Important disclosures. This article is for informational purposes only and is not an offer to sell or a solicitation of an offer to buy any security. Any offer is made only through the Private Placement Memorandum, Operating Agreement and Subscription Agreement of Matador Note Fund 1 LLC, which govern in all cases and should be read in full, including the risk factors. Interests are offered only to accredited investors as defined in Rule 501 of Regulation D, pursuant to Rule 506(c); accredited status must be independently verified. Real estate debt investments involve significant risk, including possible loss of principal. The 8% preferred return is non-cumulative and is payable only from available distributable cash at the manager's discretion; it is not guaranteed. The 8–12% figure is a target objective, not a promise or projection of results. Targeted returns are not guarantees of future performance, and past performance is not indicative of future results. Figures describing prior lending are the manager's own lending record and are not audited fund performance. Nothing here is legal, tax or investment advice. Matador Lending LLC is not a registered investment adviser.