Bare Minimum - Promissory Note & Deed of Trust
A promissory note (“Note”) is a class of legal instruments that represents the obligation of a Borrower to pay money to another party. The Note is the Borrowers unconditional promise to pay a sum certain to the Lender. A promissory note is a Negotiable Instrument that requires specific language and gives the Lender immunity to certain defenses. By itself, a Note is unsecured. Notes are typically signed only by the Borrower and almost never recorded in Texas.
A Texas Deed of Trust secures repayment of a Note against real property. If Borrower fails to pay as required under the Note, the Lender can foreclose on the real property by following applicable state and federal laws. Deeds of Trust involve the Borrower conveying a lien to a Trustee, for the benefit of the Lender, and details the specific terms and conditions of when the Trustee may foreclose on the lien. Where the Promissory Note represents the IOU, the Deed of Trust represents the Lender’s security in the Borrower’s collateral. A Deed of Trust can secure fixtures and personal property, as well as real property. To set priority in Texas, the lien must be recorded in the real property records of the county where the property is located.
Augmenting
Moving beyond just a Note/Lien, Lenders and others require more to close a real estate transaction. Institutional Lenders (big banks) have their package of notices and disclosures. Hard Money Lenders will develop their packages to protect their interests. For Texas Gulf Coast Lenders, a flood insurance rider may be common. Federal regulations require certain consumer disclosures under TILA/RESPA and CFPB. Texas has consumer lending requirements under Texas SAFE Act. Mortgage brokers and title companies have disclosure requirements for their licensing compliance. Attorneys typically have a non-representation letter because the Borrower usually pay the fees, but the attorney represents the Lender, and the letter is the Borrower’s acknowledgement.
Private Lenders should discuss what other documents to include with the Note/Lien. In REI, if the Borrower is an individual, it is common to have a “Business Purpose Affidavit” to estop consumer claims. If the Borrower is an entity, the Lender should require a personal guaranty.
All content is for informational and educational purposes. Jerel Ehlert is licensed to practice only in Texas. The laws of your state may be different. Laws change over time, and discussions are a reflection of the laws at the time of writing. Seek competent legal advice based on your circumstances. This is not a substitute.