New Line Cinema originally refused to give Robert Englund a pay raise, and an extra was cast as Freddy at the start of production. After two weeks of filming, Robert Shaye realized this was a terrible lapse in judgment, and met Englund's demands.
This film is famous for having undertones and themes that many perceive as homoerotic, and the events of the film are often seen as an allegory for Jesse's closeted homosexuality. While the makers of the film initially denied that this subtext was intentional, Screenwriter David Chaskin eventually admitted that the subtext was intentionally written into the script, in order to give the characters more depth.
Mark Patton, an openly gay actor, has amusingly stated that he sees himself as the "first male scream-Queen", due to a combination of factors, including the film's homoerotic subtext, the fact that he was often depicted on-screen screaming "like a girl", and because he viewed the character as a closeted gay man.
The film was extremely well-received in Europe, as residents of those countries caught (and loved) the sexual overtones. This overseas popularity is what convinced producers that they had a profitable franchise on their hands.
Make-up Effects Artist Kevin Yagher replaced David B. Miller, who designed the Freddy make-up for the original. Yagher only had a few pictures, and the original film as reference, so he redesigned Freddy's look. Studying pictures of burn victims, he made changes to Freddy's look, namely by bringing out the facial bones.
JoAnn Willette is one of the girls seated in the back of the school bus driven by Freddy at the beginning of the film. She appeared in the ABC sitcom Just the Ten of Us (1988), a program which not only featured numerous references to the "A Nightmare on Elm Street" franchise, but also co-starred Heather Langenkamp (from the first, third, and seventh films) and Brooke Theiss (from the fourth film).
Had this film failed, New Line Cinema might not have survived. The movie hit big enough to finally give the studio some cash flow, and in the following years, New Line Cinema rode the Elm Street train to further success, had a hit with another horror franchise (Critters (1986)), cranked out John Waters' movies, and turned into both a respectable and profitable mini-major during the 90s. However, all of that was uncertain back when this film was being made. Studio head Robert Shaye micromanaged every aspect of the production, regularly confusing crew members by stepping over the line and offering orders which should have come from the director. That led to an understandably uneasy relationship between Shaye and Jack Sholder. On top of this, the production was remarkably rushed, slotted for a November 1, 1985 release date, when the first film had only been released on November 9 of the previous year. As a result, tensions were high, the hours were long, and the work was hard. There was no real time to stop and second guess the direction of the franchise. In the Never Sleep Again documentary, Robert Englund recalls several moments during filming, such as the pool sequence where Freddy appears to teenagers outside of their dreams, where he struggled with playing the part, because so much of it felt like it was going against the rules set in the first installment.
Gregg Fonseca, the original film's Production Designer, initially returned to fill the same role in this film. He designed all the sets seen in the film, but quit just before the start of shooting, claiming that the production was rushed, and that his department in particular was severely under-funded. Art Director Maggie Martin took over Fonseca's role during the actual shoot.
Rather than continue the story of the first film's sole survivor Nancy (Heather Langenkamp), this movie focuses on the new residents of Nancy's old Elm Street house, joining a grand tradition of horror sequels which ignore the survivors of the prior installment for what would appear to be cost-control reasons. Langenkamp told the Never Sleep Again documentary that she was never actually offered a chance to do this movie, and the film's Line Producer couldn't recall if there had ever actually been any internal discussions at New Line Cinema about bringing her back. It has been hypothesized that David Chaskin and Jack Sholder's new concept of Freddy (possessing someone in the real world vs. killing them in their dreams) seemed so different from the first film, that bringing Nancy back wouldn't make a lot of sense.
The dance scene was meant as an homage to Risky Business (1983). Sensing impending embarrassment, Mark Patton didn't actually want to do it, forcing the production to repeatedly postpone the filming of the scene. It was initially stated in the Never Sleep Again documentary that Patton figured out his own choreography, told the filmmakers to roll the camera, and he'd give it his best shot. Patton later changed his story, telling WithoutYourHead, "There's nothing I do in that movie that's not written in the script. If you look in the script, it says, 'Jesse bumps his ass against the door three times and gets on the bed and pretends to masturbate.' It's all written in the script. I didn't make that stuff up." While the scene has haunted some of the involved parties for years, Patton says it enjoyed an extended popularity at gay clubs at the time, and he no longer finds it embarrassing.
The last film in the original "A Nightmare on Elm Street" franchise in which Nancy's house is the focal point of Freddy's terror. The rest of the franchise focuses more on the town of Springwood, with the house making an occasional appearance. In the hybrid film Freddy vs. Jason (2003), it was referenced that Lori lived in Freddy's house, but the scene was cut from the theatrical release (it does, however, appear in the Deleted Scenes section on the DVD release).
Special Effects man Rick Lazzarini created a "demonic parakeet" puppet for the scene in which the Walsh's pet bird flies around and explodes. His puppet was not used, because the filmmakers wanted a regular looking bird.
One of the inspirations for Freddy's look in this film was the Wicked Witch of the West, from The Wizard of Oz (1939). In Freddy's Dead: The Final Nightmare (1991), Freddy actually appears in a character's nightmare as a version of the Wicked Witch.
When Lisa finds Nancy's diary while helping Jesse unpack, she reads the address as 1428 Elm Street. The address of the house used for all the exterior shots is 1428 N. Genesee Avenue in West Hollywood.
The trivia items below may give away important plot points.
Wes Craven refused to work on this film because he never wanted or intended to have A Nightmare on Elm Street (1984) become an ongoing franchise (and even wanted the first film to have a happy ending). He also didn't like the idea of Freddy manipulating the protagonist into committing the murders.
The sequence where Freddy terrorizes the pool party was viewed by the cast, crew, and many fans as the most nonsensical scene in the movie. It was believed that it broke the rules set forth by Wes Craven in the first film, namely because Freddy was attacking people while they were awake.
As Jesse transforms into Freddy, we see a quick shot of Freddy's eye staring out of Jesse's open mouth. To accomplish the shot, effects artists made a dummy of Mark Patton's head with a hole for Freddy's eye to look through. They then affixed this prop to a flat surface and had someone put their head into the opening. The only person whose head could fit was the girlfriend of Special Effects Designer Kevin Yagher. It is the only time in the franchise that Freddy is portrayed by a woman (not counting the times he pretended to be other people in the dream world).
The scene with the possessed parakeet was based on the film The Birds (1963). Clu Gulager had his eye injured during filming of the scene. Producers later regretted even putting it in the movie, as it was too "goofy".