Deed of Trust & Note | 12 CFR 1026.36 Compliant

The promissory note is the debt. It is a negotiable instrument under Article 3 of the Uniform Commercial Code, and it can be sold or endorsed. It sets the amount borrowed, the rate, the amortization method, whether a balloon comes due, and what follows default. The deed of trust is the security. It conveys bare legal title to a neutral trustee, who holds it for the lender until the note is paid and then reconveys. Three parties sign: the trustor (buyer and borrower), the beneficiary (seller and lender), and the trustee, usually a title company or an attorney.

That third party is the whole point. Because the trustee already holds title with a power of sale, the lender reaches the collateral after default without a judge. Neither document resembles a contract for deed drafted to state executory contract statutes, where the seller keeps title until the final payment. Here the buyer owns the house from closing day and the seller holds a lien, which changes tax treatment, forfeiture rights, and the name on the tax roll.

Private lending against a home rests on a federal layer most sellers discover too late. The Dodd-Frank Wall Street Reform and Consumer Protection Act pulled seller financing into Regulation Z, and the CFPB Loan Originator Rule decides whether the person carrying the note is an unlicensed originator. Under 12 C.F.R. §1026.36(a)(5), a natural person, estate, or trust financing one property in any twelve-month period avoids originator status, provided it owned the property, did not build the residence in the ordinary course of business, and writes a note with no negative amortization. Under §1026.36(a)(4), any person including an LLC may finance three or fewer properties in twelve months, but the note must then be fully amortizing, which kills the balloon, and the seller must find in good faith that the buyer can repay under §1026.43(c). The operative text sits on the Cornell Legal Information Institute page for the Regulation Z seller financer exclusions.

State originator licensing under the SAFE Act, 12 U.S.C. §5101 et seq., sits on top. Then comes the due-on-sale problem. The Garn-St Germain Depository Institutions Act of 1982, 12 U.S.C. §1701j-3, makes acceleration clauses enforceable on residential property of fewer than five dwelling units, with nine carve-outs for death, divorce, junior liens, and certain inter vivos trust transfers. An arm's length sale is not one of them. Priority then runs from the date of recording under acts such as Cal. Civ. Code §1214, and an unrecorded lien loses to a later good faith purchaser. A lease with option to purchase agreement sidesteps part of this, at the cost of giving the buyer no title.

The classic trigger is a buyer with a real down payment, verifiable income, and a credit file underwriting will not clear. Self-employed borrowers two years out from a restructuring, recent arrivals with thin credit files, and buyers of houses that will not appraise all end up here, and a carryback note bridges the gap. The second scenario is the intrafamily loan, where a parent funds a child's purchase and needs the transfer to read as a loan rather than a gift. The IRS treats an undocumented advance as a gift with unpleasant regularity, and a recorded lien plus a note bearing the applicable federal rate holds that line.

Investors use the pair constantly. Sellers of rental portfolios spread capital gain over an installment sale under IRC §453. Two edge cases matter. The wraparound, where the seller's bank loan stays in place and the new note wraps around it, is lawful in most states, tightly regulated in Texas, and exposed to acceleration. A seller taking back a junior lien behind a new institutional first holds a lien that a senior foreclosure will wipe out, so the terms must price that risk.

• The note terms open with principal, interest rate, first payment date, maturity, and amortization method. The template separates a fully amortizing schedule from an interest-only or balloon structure and flags the §1026.36(a)(4) condition when you report a second financed property.
• The granting clause and trustee designation name the three parties and convey the property in trust with power of sale. The legal description carries over from the warranty deed that conveys title at closing, because a description that misses the deed of record is the most common recording rejection.
• The acceleration and power of sale clause tracks the notice architecture of your state: cure period, notice of default, notice of sale, manner of service.
• The escrow, tax, and insurance covenants require the borrower to keep taxes current and hazard coverage in force with the beneficiary named as loss payee. A lender who never verifies the endorsement discovers the omission after the house burns.
• The due-on-sale and due-on-encumbrance clause allows acceleration if the borrower conveys the property or records a junior lien without written consent, mirroring Garn-St Germain so exempt family transfers stay exempt.

California runs the nonjudicial sale through Cal. Civ. Code §2924: a recorded notice of default, a three-month wait, then a notice of sale recorded and published at least twenty days before the auction. Code Civ. Proc. §580b bars any deficiency on a purchase money instrument given to the vendor, and §580d bars one after any nonjudicial sale, so a California carryback is functionally nonrecourse. That protection cannot be waived in the note. Carryback sales also fall under Civ. Code §§2956 to 2967, and §2966 makes the holder warn the borrower between 90 and 150 days before a balloon falls due.

Texas pairs a fast trustee's sale with strict paperwork. Tex. Prop. Code §51.002 requires a 20-day notice of default and opportunity to cure on debt secured by a borrower's residence, then 21 days' written notice of sale, with the auction held on the first Tuesday of the month at the county courthouse. Deficiency survives under §51.003 for two years, subject to a fair market value offset. A seller financing a house that still carries a bank lien must deliver the seven-day disclosure to the buyer and every lienholder under §5.016, and wraparound loans fall under Chapter 159 of the Texas Finance Code.

Florida uses mortgages rather than deeds of trust, and foreclosure runs through the circuit court under Fla. Stat. Chapter 702. The tax trap catches nearly every private lender: documentary stamp tax is due on the note under Fla. Stat. §201.08 and on the recorded instrument, and most District Courts of Appeal hold the instrument unenforceable until the tax is paid, as in Klein v. Royale Group.

New York is judicial only. Foreclosure proceeds under RPAPL Article 13, a residential home loan triggers the 90-day pre-foreclosure notice of RPAPL §1304 plus the filing under §1306, and RPAPL §1301 forces an election of remedies, so suing on the note forfeits foreclosure without leave of court. Where a revocable living trust holds title, confirm the trustee powers before the instrument reaches the clerk and budget for mortgage recording tax under Article 11 of the Tax Law.

You start by selecting the state where the property sits, and the form branches at once: pick Florida or New York and it produces a mortgage with judicial foreclosure language, pick California or Texas and it produces a deed of trust with a power of sale and the local notice periods. Next you identify every party who will hold title and paste the legal description exactly as it appears on the recorded deed. The financing screen asks for principal, rate, term, payment frequency, and whether a balloon applies; report a second financed property inside twelve months and the form warns you about the Regulation Z amortization condition. You then name the trustee, set the tax and insurance obligations, and decide whether prepayment is permitted. The last screen builds the acknowledgment blocks your county recorder expects.

The most expensive mistake is signing the note and never recording the security instrument. Sellers do this out of misplaced courtesy toward a buyer they know, and the lien then loses to a later mortgage, a mechanic's lien, or an IRS filing. A close second is copying the legal description from a tax bill instead of the recorded deed, which produces an instrument the recorder rejects or records against the wrong parcel. Third, sellers write a balloon into a note that cannot carry one, having financed a second property in the same twelve months.

The remaining errors cluster around the underlying loan and the selling entity. Leaving a bank mortgage in place without disclosure invites acceleration and, in Texas, a statutory violation. Naming a seller personally when a company holds title breaks the chain, and an entity carrying a note should have the deal authorized in its LLC operating agreement first. Many lenders also skip the request for notice of default and hear about a senior foreclosure from the auction results.