Fisher Law Corporation’s Frequently Asked Questions

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Notice: The information contained in these articles is designed to provide accurate information in regard to the subject matters covered and is made available with the understanding that the information provided does not constitute the rendering of legal or professional services. All information is of a general nature, is specific to California law only, and is not intended to to replace professional or legal advice. Each person’s situation is unique and the information contained herein cannot be applied to any individual’s situation. If legal advise is required, the services of a professional should be sought.


What is an all-inclusive deed of trust? »

What is CERCLA? »

How does a condominium differ from a house? »

What are Covenants that run with the land? »

What is a deed in lieu of foreclosure? »

What are easements? »

What are Encroachments? »

How does escrow work? »

What is fire and flood insurance? »

How do foreclosures work? »

What are the different forms of doing business? »

What do trade terms mean? »

What are liquidated damages in real property contracts? »

What is a Lis Pendens? »

How do loan modifications work? »

What is a Mechanic’s Lien? »

How does a Multiple Listing Service work? »

What is an off-shore trust? »

How do real property taxes work? »

What is Procuring Cause? »

What is a Quitclaim Deed? »

What is RESPA? »

Who bears the risk of loss during escrow? »

What are second deeds of trust? »

What is the Statute of Frauds? »

What is Statute of Limitations on Debts Secured By a Mortgage? »

Does a buyer’s broker have a duty to inspect? »

What is The Parol Evidence Rule? »

What is Adverse Possession? »

 


Q. What are second deeds of trust?

A. Seller carrybacks and second deeds of trust have been used in connection with real estate transactions in California since our modern recording system came into effect. However, seller carrybacks and second deeds of trust have become increasing popular.

A seller carryback is a term used to describe when the seller of real property finances all or part of the sale himself or herself. For example, when a buyer lacks sufficient funds for a downpayment, often times a seller will agree to carry back the downpayment in the form of a promissory note and second deed of trust (normally, a bank finances roughly 80% of the sales price, securing its loan with a first deed of trust). Sometimes, a seller will agree to finance the entire purchase price itself, taking a first deed of trust as security for repayment.

Another type of second deed of trust is when a lender provides a home equity loan or a home improvement loan, securing its interest with a second deed of trust.

There is one crucial difference between a seller carryback and a second deed of trust given to a lender who issues a loan after the original purchase. In the first example, the seller carryback is deemed a purchase money loan. A borrower of a purchase money loan cannot be sued for a deficiency judgment. This means that if the borrower defaults on the loan, the lender’s sole remedy is to foreclose on the property and, if the foreclosure sale does not bring in sufficient funds to pay the loan balance in full, the lender is barred from suing the borrower for the difference.

On the other hand, a borrower who takes out a non purchase money loan, such as a home equity loan or home improvement loan, is not protected by California’s antideficiency laws. This means that after a lender conducts a foreclosure, it may be able to pursue the borrower in a civil suit for the difference. In order to preserve its right to sue the borrower for a deficiency judgment, the lender must first foreclose in a judicial action. If the lender elects to foreclose using a private foreclosure process (a trustee’s sale), it loses the right to seek a deficiency judgment.

A seller of real estate who contemplates taking a second deed of trust must be aware of the potential problems that can arise. For example, the seller must realize that if the borrower defaults on the first mortgage, he or she must be prepared to make the payments on the first mortgage or lose his or her investment in the second deed, possibly being wiped out at a foreclosure sale by the senior lienholder.

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