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[ Follow Ups ] [ Post Followup ] [ The Forum Board ] [ FAQ ] Making trust deed loans Posted by Ward-CA- on January 26, 2004 at 11:47 AM In Reply to: 2nd Trust Deeds posted by Rich on January 23, 2004 at 1:49 PM : Hi, : I was wondering if someone could give me a little more information on second trust deeds in California. Basically, someone is asking to borrow a significant amount of money from me, and has offered to secure this loan with property that is already been deeded. How does one go about obtaining a second trust deed? Does the "homeowner" have any right to issue this second trust deed or do I need to get something from the bank that holds the primary deed? Also, what are my rights of foreclosure if he stops paying me but continues paying his primary debt? : Thanks ====================== Rich, Until you understand a lot better the mechanics of making loans secured by real property I would suggest you do the prudent thing and make the loan using the two primary safeguards in CA that most buyers/sellers/lenders use, and those are an escrow service and title insurance. In your case, since your loan is going to be secured by real property, you should also insist on getting a formal, fee-based appraisal. And the nice thing about these safeguards is, as a lender, is it is common for the borrower to pay for all the costs of a fee appraisal, a loan escrow and title insurance as a condition for you making the loan. You probably don't want to lend the borrower any more money than the difference between the balance of his first trust deed and 80% of the value of the property as shown by the appraisal of the property. For example, let's say the property's current fair market value (FMV) is shown to be $600,000. and the balance of his 1st is $400,000. The owner's equity would amount to $200,000. However, for safety's sake, you want an equity cushion after you make your loan of 20% of the FMV. So 80% of the FMV $480,000. Since the 1st equals $400,000 then all you would want to safely lend the owner is the difference...which is $80,000. And that would be secured by a 2nd trust deed and promissory note. Now, have you given any thought to the terms of your secured loan? The usury law of CA won't allow you to charge any more than 10% annual interest unless the loan is being brokered by a licensed agent. Are you going to require monthly payments on the 1st of each month (you can charge up to 6% of any payment made late)? Will the payments amortize or are they just interest only? When will the loan become due, after how many years? Now, let's address your specific questions: #1. A trust deed, no matter if it's a first, second, third, etc. is a notarized, recorded, security document that's voluntarily signed by a property owner. The trust deed acts to secure the title of real property as collateral to ensure the repayment of a loan. The two forms required (trust deed and a promissory note) are freely provided by escrow. The escrow officer will fill them in and witness their signature by the borrower. At the close of escrow you will receive the promissory note, a copy of the trust deed, the title insurance policy, etc. The original trust deed will be sent to you by the county recorder's office after it's been processed. When the loan has been fully paid off you will send the promissory note and the trust deed to the trustee named on the trust deed. The trustee will then prepare and record a reconveyance at the county reacorder's office, showing the 2nd trust deed and note has been paid off. #2. It would be extremely rare for a property owner to selectively pay on one of their loans and not on another. Usually the reason for not paying on their house loans is that they're broke. If that's the case they won't be paying on any of their loans. When a borrower defaults on making his monthly payments all the lender has to do is contact the trustee of their trust deed and tell them to start a foreclosure to force the borrower to pay. If that fails to motivate the defaulting owner the trustee will auction off the property to the highest bidder at the Trustee's Sale and pay you off. Hope this helps. Follow Ups: Post a Followup: Name : E-Mail : Subject : Comments: : : Hi, : : I was wondering if someone could give me a little more information on second trust deeds in California. Basically, someone is asking to borrow a significant amount of money from me, and has offered to secure this loan with property that is already been deeded. How does one go about obtaining a second trust deed? Does the "homeowner" have any right to issue this second trust deed or do I need to get something from the bank that holds the primary deed? Also, what are my rights of foreclosure if he stops paying me but continues paying his primary debt? : : Thanks : ====================== : Rich, : Until you understand a lot better the mechanics of making loans secured by real property I would suggest you do the prudent thing and make the loan using the two primary safeguards in CA that most buyers/sellers/lenders use, and those are an escrow service and title insurance. In your case, since your loan is going to be secured by real property, you should also insist on getting a formal, fee-based appraisal. : And the nice thing about these safeguards is, as a lender, is it is common for the borrower to pay for all the costs of a fee appraisal, a loan escrow and title insurance as a condition for you making the loan. : You probably don't want to lend the borrower any more money than the difference between the balance of his first trust deed and 80% of the value of the property as shown by the appraisal of the property. : For example, let's say the property's current fair market value (FMV) is shown to be $600,000. : and the balance of his 1st is $400,000. The owner's equity would amount to $200,000. However, for safety's sake, you want an equity cushion after you make your loan of 20% of the FMV. : So 80% of the FMV $480,000. Since the 1st equals $400,000 then all you would want to safely lend the owner is the difference...which is $80,000. And that would be secured by a 2nd trust deed and promissory note. : Now, have you given any thought to the terms of your secured loan? The usury law of CA won't allow you to charge any more than 10% annual interest unless the loan is being brokered by a licensed agent. : Are you going to require monthly payments on the 1st of each month (you can charge up to 6% of any payment made late)? Will the payments amortize or are they just interest only? When will the loan become due, after how many years? : Now, let's address your specific questions: : #1. A trust deed, no matter if it's a first, second, third, etc. is a notarized, recorded, security document that's voluntarily signed by a property owner. The trust deed acts to secure the title of real property as collateral to ensure the repayment of a loan. : The two forms required (trust deed and a promissory note) are freely provided by escrow. The escrow officer will fill them in and witness their signature by the borrower. At the close of escrow you will receive the promissory note, a copy of the trust deed, the title insurance policy, etc. The original trust deed will be sent to you by the county recorder's office after it's been processed. : When the loan has been fully paid off you will send the promissory note and the trust deed to the trustee named on the trust deed. The trustee will then prepare and record a reconveyance at the county reacorder's office, showing the 2nd trust deed and note has been paid off. : #2. It would be extremely rare for a property owner to selectively pay on one of their loans and not on another. Usually the reason for not paying on their house loans is that they're broke. If that's the case they won't be paying on any of their loans. : When a borrower defaults on making his monthly payments all the lender has to do is contact the trustee of their trust deed and tell them to start a foreclosure to force the borrower to pay. If that fails to motivate the defaulting owner the trustee will auction off the property to the highest bidder at the Trustee's Sale and pay you off. : : Hope this helps. Optional Link URL: Link Title: Optional Image URL: [ Follow Ups ] [ Post Followup ] [ The Forum Board ] [ FAQ ] WWWAdmin 2.0a © 1997 Matt Wright and DBasics Software Company, All Rights Reserved

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