Using Deed of Trust to Secure Real Estate Financing
A deed of trust is a deed wherein legal title in real property is transferred to a trustee, which holds it as security for a loan (debt) between a borrower and lender. Therefore a deed of trust is used with real estate transactions that require financing from banks or hard money lenders. Deeds must be recorded with the county recorder to identify the first lien holder. When the loan if satisfied the lien is removed against the property and the deed becomes void. Let us look at using deed of trust to secure real estate financing.
A deed of trust is comparable to a mortgage note. A Trustee is assigned to hold the real estate note until the loan is repaid. Trustees are typically the title company but could be another independent party. The trust deed is used to transfer the title to the Trustee and provide beneficiary rights to the lender. Lenders are listed on the deed as a secured creditor so they are protected if borrowers default on their loan. Real property is used as collateral to secure the mortgage note. For instance, if borrowers default on loan payments the Trustee can foreclose on the property and take possession.
The lenders issue a promissory note which is used in conjunction with deeds. This document provides details of the borrower’s financial obligation. Therefore it should include the amount of money borrowed, interest rate, payment amounts and dates, default clause, and prepayment penalty. Due to the fact that promissory notes and trust deeds are legal contracts it is imperative to read and understand what is included. Most people find it beneficial to hire a real estate attorney to review contracts prior to signing.
Ensure everything is correct. Therefore look over the names of the lender and Trustee. Review the amount of borrowed funds and interest rates, along with prepayment and default clauses. It’s advisable to protect deeded property with a revocable living trust. However, certain steps must be taken. Banks typically do not provide real estate financing for property secured by a trust.
If the loan is ever modified then borrowers must also modify the living trust. As an example, if borrowers refinance to obtain a reduced rate of interest they would remove the real estate from the trust so lenders can record a new deed. Once the document is recorded, borrowers put the property back into the trust. The workaround is to have a lawyer prepare a legal opinion letter which states that provisions are included to protect the lender. Opinion letters undergo a review process by bank committees and will prolong approval and closing procedures.
Real estate that is secured with a deed has to be appraised by a licensed and certified appraiser. Homeowner’s insurance must include provisions against loss or claim. Each of these actions will cause borrowers to incur legal and court filing fees. Establishing a living trust is usually a good way to protect encumbered property, but there are instances where it can be a hindrance. Therefore, it’s advisable to consult with an attorney to assess the pros and cons prior to taking out a real estate loan.