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Mortgages, Trust Deeds and Notes

Investment Mortgages, Trust Deeds & Notes

You Can Become a Lender

Yet another option available to you, as a self-directed investor, is the opportunity to lend a portion of your IRA to a qualified borrower.  The terms of repayment can be defined in a promissory note.  If your qualified borrower uses the loan to purchase real estate, you can secure your loan with a Mortgage or Deed of Trust.   If you make a loan that is not tied to real estate or personal property, you can still define the parameters of the loan with an unsecured promissory note. 

Mortgage vs. Deed of Trust

People are sometimes confused by terminology.  The security instrument utilized, either a Mortgage or a Deed of Trust, is determined by only one thing: the state. Some states call it a mortgage, and others call it a deed of trust—the terms are interchangeable.   Refer to your state statutes for guidelines and your rights as a lender under a Mortgage or Deed of Trust.

Promissory Note (Note)

The easiest way to explain a promissory note is that it’s like an IOU with stipulations (it is also legally binding). These stipulations include specific repayment details such as original loan amount (principal), the repayment schedule and any applicable interest rates.

Secured Loans vs. Unsecured Loans

In the case of a promissory note (or any time you are not privy to what your funds are being used to purchase), you have the right to decide whether your loan will be secured or unsecured. A secured loan is tied to an asset such as a car or property. If the borrower defaults, you can claim the asset as collateral, perhaps choosing to sell it to restore your lost funds. An unsecured loan is not tied to an asset, and instead the creditor may satisfy the debt against the borrower rather than just the borrower’s collateral.

What are the advantages to becoming a lender?

Unlike purchasing real estate, lending is much easier to manage:

  • Payment collection
    • Ability to react quickly if borrower defaults
    • Simple legal procedures for foreclosure
  • Short term investments vs. lengthy mortgage with real estate purchase
    • The investor controls the length of the loan
  • Flexibility in terms
    • Deeds of Trust or Mortgages provide security
  • You can work with a company that matches investors with borrowers
    • Undivided Interest
    • Proportionate Income