An all-inclusive deed of trust (AITD) is employed when there is a mortgage that includes in its balance an underlying mortgage. This scenario happens when a preexisting loan is absorbed into a new loan made by a property’s seller: rather than having two distinct, separate mortgages, the “wraparound” mortgage includes both. These loans are financed by the property’s seller in order to help the buyer complete the purchase. An AITD wraps around this loan and is typically recorded at the close of escrow, with a Grant Deed conveying full title to the buyer, with Title Insurance issued. Sellers are responsible for payment on the underlying loan. Their equity position on the Note is the difference between what is owed from the buyer to the seller, and what is owed from the seller to the underlying lender. The AITD is a junior trust deed that is subordinate to the underlying trust deed.
One example of a situation in which an AITD might be issued: say there is an existing mortgage of $100,000 at 6% interest, and that a second mortgage could be arranged for $50,000 at 10% interest. Instead of obtaining that second mortgage, the borrower arranges for an all-inclusive deed of trust for a combined loan amount of $150,000 at 8% interest. The first mortgage remains intact, but the borrower pays the wraparound lender on the wraparound, and the wraparound lender remits the payment on the first mortgage to the initial lender.
One of the benefits of having an AITD is that it is more flexible and allows the borrower to negotiate all of its terms. This includes payment amount, interest rate, maturity date, late chargers and prepayment penalty. AITDs also allow buyers who cannot come up with large down payments, or who might have unusual credit history, to be able to go through the loan process. The buyer does not need to qualify for a loan with a lender, and closing costs are generally minimal. However, there are some precautions that buyers must take in regards to wraparound loans. Interest rates are typically higher on the underlying loan, in order to profit the seller. Also, an underlying lender might enforce the “acceleration clause,” or “due on sale” clause, and require the underlying loan to be paid in full.
The bottom line is that being able to buy a house quickly through an AITD may be very appealing, but buyers must make sure they fully understand the potential benefits AND implications before entering into a transaction.
(This article is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. If you have any questions about this Article, please call or e-mail Stephen Vokshori, Esq. (213.785.5366 / firstname.lastname@example.org) or any other member of Vokshori Law Group.)
This article is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. If you have any questions about this VLG Article, please call or e-mail Stephen Vokshori, Esq. (213.986.4323 / email@example.com) or any other member of Vokshori Law Group.
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