What Are the Mechanics Involved With Taking Back a Second Deed of Trust?
- When payment is made in full, the trustee transfers the property back to the trustor. If more than one loan is made on the same real property, each loan is secured by a separate independent deed of trust that is prioritized according to date. The earliest date is the first deed of trust and so on. The first is paid in full before the second, second before third. When the first is paid, the second becomes first, third becomes second and so on. However, if the trustor defaults on the first deed of trust, the trustee has the power to sell the property. The trustor granted the trustee this power when the trustor signed the deed of trust.
- Some homeowners use second deeds of trust as creative financing tools to sell their homes. For example, assume a homeowner has put his home on the market for $550,000. A person is interested in purchasing the property but can obtain a mortgage for only $500,000. The homeowner has the option of rejecting the purchaser in favor of a potential purchaser who can meet the full asking price or taking back a second deed of trust for the difference between the mortgage/first trust and the asking price. As a result, the purchaser has a mortgage/first deed of trust from the bank of $500,000 and a loan/second deed of trust from the homeowner of $50,000.
- Deeds of trust are legal documents, so always consult an attorney.Comstock/Comstock/Getty Images
Deeds of trust are legal documents with several provisions. Therefore, it goes without saying, an attorney should be present at the proceedings from step one. The attorney should be able to explain the legal terms to a layperson without insulting the layperson's intelligence. - A second deed of trust is a potential selling tool with risks. Second and subsequent deeds of trust are subordinate to the first. If the trustor (borrower/purchaser) defaults on the first deed of trust, the second and subsequent trusts are wiped out. The second and subsequent lenders (beneficiaries) can opt to take court action. However, if the trustor cannot pay the first deed of trust, it is unlikely he will be financially able to pay the second and subsequent deeds of trust.
