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A second deed of trust is a loan that is granted against a property’s value when one such loan already exists. Loans for real property are numbered in terms of the date they attached. If a home buyer gets a bank loan to purchase a house, for instance, that loan is considered the primary, or first, deed of trust. If the buyer later gets another loan for the same property, that loan is the second deed of trust. Second deeds of trust are junior to primary deeds of trust, and a primary deed must always be paid off first. For this reason a second deed of trust is considered risky, and usually carries a high interest rate.
Trust deeds are very similar to mortgages. Most of the time, local law is what dictates whether a borrower uses a mortgage or trust instrument to guarantee a debt. In the United States, it is up to individual states to identify as either “mortgage states” or “trust states,” based on the real property and bankruptcy laws in force there. The primary difference is in number of parties involved.
In a mortgage situation, there are two parties: the lender and the borrower. In a trust, there are three: the lender, the borrower, and a trustee, who holds title to the property for the benefit of the owner. Most of the time, particularly with commercial deeds of trust negotiated through banks or other large entities, the trustee and the lender are the same. It is often the case, then, that mortgages and trusts function indistinguishably.
The most common use for trust deeds is in securing capital to buy property. Houses generally cost more than a purchaser can afford to pay upfront, and a deed of trust acts a promissory note giving the purchaser access to a certain sum of money contingent on payback on a specified schedule, with interest. It often happens, though, that the amount of money a lender is willing to extend to a buyer is less than what the buyer needs to purchase his desired home. In this case, the lender can apply for a second deed of trust, either from another commercial lender or from the seller himself. The second deed of trust will fill the gap between the purchase price and the amount of money lent in the first deed of trust.
Borrowers can also apply for second deeds of trust later in time. For most people, a house is the biggest piece of equity they own. Taking out a loan against that equity is a way to free up money that can be used for repairs or improvements. Sometimes, money from a deed against property can also be used for expenses totally unrelated to the home, like paying off other debts or buying a car.
Second deeds of trust are usually granted with much tighter strings than first deeds of trust. This is because of the heightened risk to the lender that the money may never be paid back. Trusts must always be paid back in order of their granting. If a borrower goes bankrupt, for instance, his assets will be liquidated, and the first trust must be paid off in full before a second trust holder will receive any payment.
The risk of foreclosure is also something that a second deed of trust lender will consider. If the borrower defaults on the first trust, that first owner can foreclose on the property. If this happens, all junior liens, including any second deed of trust, are usually eradicated. A second deed of trust owner can sue the borrower for fulfillment of the trust terms, but if the borrower is unable to pay, a lawsuit generally does little good. Even a court-ordered judgment against a borrower is virtually unenforceable if the borrower is insolvent.