Difference between promissory note and deed of trust in owner financing
The buyers have to navigate their way through many legal and financial formalities when buying a home with owner financing in Houston TX. These formalities dictate all your repayment terms. Since a conventional lender is not involved in the deal, the home buyers sometimes feel vulnerable. Overwhelmed with incomprehensive legal terminology, they become prone to make mistakes.
Here at Shop Owner Finance, we help credit-challenged home buyers learn how they can protect themselves when buying with owner financing.
In order to understand your legal and financial obligations, you should be familiar with two most important documents in an owner financing deal: promissory note and deed of trust.
You will sign these documents regardless of whether you are buying with a conventional mortgage or owner financing. These two documents make owner financing a safe and legal way of purchasing a home.
The key difference
A home loan agreement has two parts:
- Repayment terms
- The consequences if you default
Your repayment terms are specified in the promissory note, while the consequences of default are specified in the deed of trust.
The deed of trust pledges the property as collateral. It gives the lender the right to foreclosure if you fail to pay off the loan or violate any agreement.
The deed of trust is also known as mortgage in some states, primarily where a judicial process is used by lenders to foreclose. In Texas, foreclosures are both judicial and non-judicial. In a judicial foreclosure, the lenders are required to obtain a court judgement to foreclose. On the other hand, judicial intervention is not required in a non-judicial foreclosure.
The deed of trust is typically recorded in the county office. When a title is transferred from one person to another, there will be a government record of the trust deed transfer. This is yet another reason you are legally protected when buying with owner financing. Some other methods that credit-challenged home buyers use such as rent-to-own are comparatively risky because they may not necessarily offer this type of legal protection.
As the name suggests, this document is a signed document containing the promise that you will repay the loan. The repayment terms are outlined in the promissory note. It’s a widely used document in professionally-drafted owner financing agreements. The seller typically keeps this document in an owner financing deal (because the seller is extending credit to the buyer) and a copy is provided to the buyer. The deed of trust secures the promissory note. It means that if you violate repayment terms specified in the promissory note, the trust deed empowers the lender (who happens to be the seller in owner financing) to foreclose.
The buyer is addressed as payer, while the seller as the payee in the promissory note. It also specifies:
- The total amount borrowed
- Interest rate
- The date when the promissory note comes into effect
- The date when the monthly payments are due
- The date when the promissory note is to expire
- Pre-payment penalties (if applicable).
- Balloon payment (if applicable).
There are some legal restrictions on various repayment terms. These restrictions vary from state to state. For example, the laws in some state put a limit on the maximum rate of interest.
If you are confused about any of the terms outlined in the promissory note or deed of trust, you should consult with a qualified lawyer. In a recent article, we discussed about some owner financing laws you must know about.
Here at Shop Owner Finance, we help our clients learn how they can get owner financing regardless of their credit situation and protect themselves legally.
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(Disclaimer: The information contained in this site is provided for informational purposes only, and should not be construed as legal advice on any subject matter.)