Lending Guide: Lending Process

Promissory Notes, Mortgages & Trust Deeds

All lenders, whether bank or private lender, require a promise that you will pay your debt.

This promise may be secured or unsecured. A secured debt is backed by collateral that the lender can foreclose or repossess. Examples of secured debt are real estate, vehicles, and business equipment. Unsecured debt has no backing beyond the lender’s ability to take you to court and/or collections. They may also add interest and fees to your existing debt. Examples of unsecured debt are credit cards and student loans.

Promissory Notes are the foundation of lending

Promissory notes, simply put, are a promise to pay a debt at agreed upon terms. Promissory notes outline loan details such as the maturity date, interest rate (i.e. fixed, variable, etc.), payment amount, and frequency. A lender typically does not record promissory notes with the county.

Promissory notes are not in themselves secured debt. As a result, to secure repayment with real estate, a lender “adds” a mortgage or deed of trust. These are “security documents” or security instruments because they secure the promissory note to the real estate. They also create a permanent record of the loan. This recorded document creates “notice of the lien” to anyone who may have reason to research the property’s title.

The courts consider both mortgages and trust deeds (also called deeds of trust) to be evidence of debt. The title company records this evidence in with the county of the property’s location.

You will find more hard money lenders in states that allow trust deeds as the foreclosure laws are more flexible. In most states, law dictates whether a lender can use a mortgage or a trust deed. Some states permit either document.

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Mortgages vs. Trust Deeds

Beyond the document names, you will find differences in:

  • The number of parties: A mortgage involves two parties (the borrower, or mortgagor, and the lender, or mortgagee). A trust deed involves three parties: the borrower (trustor), the lender (beneficiary), and the trustee (title company, escrow company, or bank) that holds title to the lien for the benefit of the lender. The sole function of the trustee is to initiate and complete the foreclosure process at the request of the lender.
  • Foreclosure procedures: Judicial foreclosure is the court-supervised foreclosure process that enforces mortgages. This includes the lender filing a lawsuit against the borrower. A trust deed allows the lender to bypass the court system by following applicable state law and the procedures outlined in the trust deed.
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