Chapter 10 - Loan Documents


There are different loan documents that secure an investment. However, regardless if you are loaning money on real property as security, or are investing in a deed of trust, the documents you would require for both are the same; you would require the trust deed and the note. The trust deed is what will secure the repayment of funds that are owed according to the conditions of the note, and will then become a lien on the property. The note, on the other hand, shows the initial amount that is owed based on the terms and conditions regarding the repayment of the trust deed.

While all notes function with the same end in mind, there are different types of notes that can be obtained. The following is a list of notes:


The Promissory Note - This is a common note, and as the name suggests, it is the borrowers written promise that they will pay a specified amount of money, installments of money, or money on demand to a named person, in the future, at any given time.


The Amortized Note - the amortized note is often used for real estate transactions. It requires that the borrower usually make regular monthly payments of interest and principal throughout the period of the loan.


A Holder in Due Course Note This particular note is in reference to an individual who is the innocent buyer of the note for value, and was oblivious to any defects that existed within the note when purchased. The holder of this not is protected by the law, as they are considered to be in good faith holding this negotiable note.


The Straight-Interest-Only Note The straight-interest-only note, is one that does not require payments of principal during the life of the loan. The interest payments are considered negotiable, but generally they occur as monthly payments.

Recourse Note For this note, the endorser is making a guarantee that the payments will be given to the present holder, as well as all the other holders. That being said, a person may choose to recourse a note so that the payment goes to one individual in particular and no one else. As an endorser, one should be cautious when using this note, because the payment liability is extensive.


Note Without Recourse If this note is written above the signature it implies that future holders will not be guaranteed payments.


The Demand Note This note is used only on special occasions and is subject to be called in at any time for full payment.


An or more Note some notes feature an or more clause that is located near the payment amount. This or more clause enables the borrower to rightfully increase their monthly payments when they choose, as well as the right to fully pay off the loan without being subject to penalty. However, if both parties involved in the loan agree, the or more clause can be deleted by simply having an escrow agent omit the objection.


Information Regarding Notes

You need to understand that while some notes can be negotiable, others are not. In order for a note to have negotiability, the note must have the option of unconditional promise to pay, without contingency, which is based on the future actions of the borrower. A negotiable note must provide a set sum of money for the payment at a specific time, and must be payable to the holder. However, the vast majority of notes are transferable through endorsement.


What if a note is lost?
If you lose a note, it will need to be replaced. The reason is because the original note is not a recorded instrument, like the trust deed. Thus, even if you have a copy of the original, it will not suffice because only the original note is considered to be the life of the transfer. Losing a note is a problem that is also quite costly.

The best way to replace a note is for the two parties to come together and sign a new note. If this action can not be performed, it may become mandatory that you seek the service of an attorney. An action must be filed in court to reconstruct or restore the lost note. Although, in some cases, depending on the state, sometimes the issue of a lost note can be resolved by means of a lost note affidavit.

In order to keep your original note and deed of trust safe, you should place them in a safety deposit box at your bank. However, make sure you make copies of both documents, so you can have them on hand, and refer to them later for future use.

Construction Loans


There are different construction loans that can be invested in. For instance there are:


Improvement and Renovation Construction Loan this loan is funded to enhance the value of property based on upgrades and modifications.


Ground-up Construction Loan This loan is one that assumes the borrower has approvals and a completed set of plans which are sufficient so that construction can begin once the loan has been funded. With a lender approved draw schedule, the proceeds of the loan may be funded over a certain amount of time.



Infrastructure Construction Loan - The proceeds for this loan are used to give the borrower the chance to develop and complete the infrastructures of the property, prior to the start of ground-up construction. The use of such loan proceeds can fund the installing of utilities, water pipers, sewers, streets, gutters, curbs and related utilities.

With a construction loan, there are certain aspects that must be followed to ensure that everything goes according to plan. For instance, the lender needs to consider inspections and lines.


Inspections to Protect Investment It is imperative that frequent inspections are conducted in order to protect the lenders investment. This protection is made possible by the coordination of project funding with the lender. Through reviewing and maintaining plans, as well as specifications that are relevant to jobs. Furthermore, contracts are reviewed to make certain that borrowed funds are sufficient to complete the project.

With this type of documentation at their disposal, the company in question can have complete control and account for construction funds from the start of the project until completion. Routine inspection reports of the construction site are prepared by an in-house inspector. This report details items that have been completed and are still under construction.


Preliminary Lien Notice With a construction loan, most states will require that a preliminary lien notice be sent to the lender, general contractor and owner before, or on labor services or material provided by the subcontractor/material supplier. Once this notice has been sent, the subcontractor has been given the right to lien a project. A construction control company that is well managed will ask each party involved to send their copies of all notices. The purpose of this procedure is so that those who supply the services and products, as well as those who are the subcontractors working on the project, can be tracked.

Finally, when it comes to a construction loan, construction control is imperative to any construction project. Prior to the hiring of a control company, its disbursement policies must be looked into. You need to understand that not every company functions the same. For instance, while some companies will consider themselves control companies, the actually disburse the funds directly to the owners or general contractor, without first making certain that the subcontractors and material suppliers have been paid. To be on the safe side, it is always in your best interest to ask whether or not a construction control company is used.

Mortgage Pool Investments

The amount of the title policy premium is based on the amount of money that is being insured by the loan.

Aside from the security of real property, with a trust deed investment, the other advantage is the investor receives higher than average rates of return. 31, paying approximately a . Acceleration Clause V An acceleration clause should be apart of the escrow documents. The signature of both the seller and buyer All of the transaction details, including the agreement made by the seller and buyer, need to be written in the escrow instructions so that it is clearly understood by all parties involved. Include important conditions V Should a late charge be included as part of the note, the investor needs to ensure that the conditions regarding the late charge, are included in both the escrow instructions and the note.

California Land Title Association (CLTA) - This policy is generally issued to a lender in second position, or to the purchaser of a property.
Thus, it is highly recommended that if you do decide to lend to either of the above mentioned entities, you require a larger money down payment and/or a lower Loan to Value. _ The owner of a trust deed is generally first or second in regards to the lien position. The best way to replace a note is for the two parties to come together and sign a new note. LTV is the percentage of the loan to the property value. A trust deed, or deed of trust is a document that is used to secure the debt on a home acting as a mortgage.

You have complete control over the term of the loan.
While some loans can have a 15 year term, many have a three year term or less. If there is more than one lien on a piece of real property there could be a number of reasons for this. The reason is because when an investor takes the foreclosure action, the borrower often realizes the seriousness of the matter and will make the effort to make the agreed payments on time. This remedy is a process known as foreclosure, and simply put; it is the process through which the property in question is sold in order to satisfy the debt owed to the lender. ) if they fail to pay the loan.