As part of the property purchasing process, a mortgage lender will require a security interest in your property. To make sure this interest takes priority over others, a first trust deed is taken.
What is a first trust deed?
When signing your mortgage loan, a trust deed is signed. This lists three parties: the borrower, the trustee, and the lender. In essence, it is a legal document giving the lender the right to foreclose if the owner is unable to pay the mortgage. Once the mortgage is repaid in full, the trustee conveys the property back to you and will remove this first trust deed lien from your property. A first trust deed has priority over or other mortgages. Because the first trust deed was recorded before any other encumbrances, liens, or trust deeds associated with your property, the lender has senior lien status.
How does it work?
Most states require the lender to record a copy of this trust deed, which means that the County Recorder has a copy for the public records. This is necessary so other lenders you may liaise with in the future knows if your property is already secured by another trust deed or mortgage. As the first trust deed has priority over others, this highlights what would happen if a lender was to foreclose on this deed. If a lender forecloses on a first trust deed, all of the other trustees will disappear. This means the lender takes your home. But if a second trust deed is taken, and this one forecloses, the lender will only take your home subject to the first trust deed. A second trust deed is no different to a first trust deed, as the first trust deed is all about the priority of the lien based on the date that the trust deed has been recorded.
How is this different from a traditional mortgage?
You may wonder if this is any different from a traditional mortgage. While every mortgage is made up of two parts, the promissory note and the trust deed, when a property is financed by a bank, it is an outside investor that purchases the promissory note and funds the loan. Therefore they have the legal title to the property. If there’s an issue with payment or there is a default, the investor has the right to sell the property. They may execute a loan buy-back agreement. This means that trust deeds allow investors to participate without a hands-on approach to real estate. Because the bank is unable to hold the title to a property if there is no trustee, and the borrower has the title, legally and physically, to the property, if the borrower ends up defaulting, this causes difficulty in foreclosing. The legal title is held by a third party, so, that trustee can foreclose on behalf of the bank, which saves time throughout the entire process.
What are the benefits of a first trust deed?
First trust deeds have a higher rate of the term and with reduced risk. The yields tend to be higher; a trust deed mortgage investment can yield between 7% and 10% on an annual basis. As yields are higher in comparison to fixed income securities, investors can make the most of these monthly interest payments as the borrower continues to pay off the mortgage. The loan is secured by a hard asset which is usually cash or real estate. Depending on the terms of the investment notes, they could very well be shorter than a standard one.
Are there any drawbacks?
As it is not insured by the FDIC, this can appear to be a risky endeavor from the outside. The appraisal process is the responsibility of the investor. And if the owner of the property declares bankruptcy, it can be a long process to recover the original investment. From the perspective of a borrower, they would pay higher rates for their loans than a typical bank. But there are valid reasons to request private money loans. If you’ve had issues obtaining a bank loan, or you’re looking for a loan with a specific term, this can be a major help to fulfill your goal. In addition to this, if there’s an issue with your credit score, but you are of good character, this can cause consternation with banks. But if you speak to one of our staff at Allied Mortgage, this can give you a more informed opinion of first trust deeds and if they will suit you. In addition to this, there could be an issue with an existing loan that could have matured, and the borrower needs more time to locate more long-term financing.
How can I make an informed decision?
As an investor needs to make a truly informed decision, you need a comprehensive Material Disclosure Package. In addition to this, you need the Subscription Agreement, the Offering Circular, as well as other documents that can highlight the risks. Other documents that you require include the loan summary of the trust deed investment, the loan application of the borrower, the regional and local location maps for the property in question. As well as this, you need credit reports of the borrower and the financial statements.
If you want to learn more about first trust deeds, be sure to get in contact with one of our specialists at Allied Mortgage. First trust deeds can be an intimidating prospect if you don’t understand the process. Our specialized staff can work with you to make sure that you understand every aspect of the mortgage process so you can have the mortgage that will benefit you the most. We realize that at this important juncture getting a mortgage on a commercial property is stressful and time-consuming. If you are on the first step of acquiring the commercial property, or you have been in the game for a while and you need additional advice, Allied Mortgage can give you the bare essentials to point you in the right direction.