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Junior Mortgages And Junior Trust Deeds
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Oct 16, 2005, 22:49
Junior mortgages and junior trust deeds play a key role in many real estate transactions. Some studies indicate that three-fourths of all property transactions include some form of junior financing.
This kind of financing gives the lender a subordinate claim against the property. It means that if you can’t repay what you’ve borrowed, the holder of the first mortgage or trust deed will get paid off first in any foreclosure sale, after which the holders of junior liens will be paid off from the leftover proceeds, if any, in order of the priority of their liens. If there aren’t enough proceeds to pay off all the lenders, too bad for those with low priority!
A subordinate (junior) claim on property may be a second, third, or lesser one. Nobody can tell just by looking at the paper whether or not it gives the holder first claim. It doesn’t say “first mortgage” or “second trust deed” or whatever. Normally, the priority depends on the date when each was recorded with the county recorder. One of the purposes of the “title search” done by an abstract or title company, before the signing of a mortgage or trust deed, is to find out what priority claims, if any, are on record.
Sooner or later, if you keep on making real estate transactions, you’re bound to take a junior mortgage or trust deed on a piece of property. Here is what you should know when you go into such a deal:
As soon as you accept the paper, you should file a “Request for Notice of Default” with the county recorder. This means that you’ll be notified when there is a default on a higher-priority loan. You may have the right to make the payments on that other loan yourself, thus preserving your claim on the property. Then you can start your own foreclosure action if you decide it will bring you out ahead.\
Most junior mortgages are short term – typically, three to five years. Longer than five years is unusual. Quite often the regular payments aren’t big enough to pay off the whole debt during the terms of the loan. Instead, the mortgage or trust deed is written to require a sizable balloon payment as the last payment due.
Purchase-money mortgages or trust deeds are simply ordinary mortgages or trust deeds issued by a buyer in favor of a seller instead of some third-party lender. They may be either first or junior. Often a buyer of property doesn’t have enough cash to close the gap between the full purchase price and other loans outstanding. To make the sale possible, the seller accepts a mortgage from the buyer as security for the buyer’s future payment of the difference. No money changes hands. But the seller is in effect “lending” the difference to the buyer in return for the security afforded by the mortgage.
Suppose you want to buy my house, and I agree to sell for $75,000. You give me a down payment of $7,500 and the bank agrees to lend you $52,500 (70 percent of the purchase price) in return for a first mortgage on the property. But this still leaves you $15,000 short. Because I’m in a hurry to sell my house, I may accept a second mortgage as security for the $15,000 you’ll still owe me. You sign a note promising to repay the $15,000 plus interest at an agreed rate. And we have a deal.
A seller who accepts a purchase-money mortgage may be saddled with the chores of checking up on the buyer’s insurance and tax payments as well as keeping after him for the monthly payments on principal and interest. If you take such a mortgage, you may want to put t in the hands of a mortgage company, for management on a fee basis, to spare yourself these chores.
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