Title and Ownership Issues
Trust Deed Investors Should Understand
Part 1
Can There Be a Non-Borrowing Spouse or Co-Owner on Title that is Not on the Loan?
One question that occasionally arises in lending is whether a spouse or co-owner can remain on title without also being a borrower on the loan. The short answer is “yes, under certain circumstances”.
Knowing and understanding the distinction between ownership (who is on Title) and borrowing (who is responsible for a loan) is an important part of evaluating a loan. But ownership and borrowing are two different things.
Someone can have an ownership interest in a property without signing the Promissory Note or being responsible for the loan. Any borrower who signs the Promissory Note, however, does take on the responsibility and obligation of the loan.
It is possible in certain transactions for a co-owner to remain on title without becoming a borrower on a loan. In fact, this is fairly common in real estate lending. Some examples of where this might be done is:
- One owner is not employed or has little verifiable income, so their income does not contribute to qualifying for the loan.
- A co-owner has significant monthly credit debts, affecting the overall debt-to-income ratios that a lender may be considering.
- The property is jointly owned but only one owner needs the financing.
- A co-owner wants to purchase another property but if they took on this mortgage debt, it could prevent them from qualifying for the other property they wish to purchase.
- One owner simply prefers not to become personally obligated for the debt, even though they are willing to allow their co-owner to obtain a loan.
However, if a co-owner will not be on the loan, I find that it is important that all owners sign certain loan documents, most importantly the Deed of Trust.
A Promissory Note creates the obligation to repay a loan. A Deed of Trust creates the lender’s security interest in the property. Because those documents serve different purposes, it is common for all owners of the property, even if they are not borrowers, to execute the Deed of Trust. Doing so helps ensure that the lender’s lien properly attaches to each owner’s interest in the property, even if they are not personally liable for the loan.
With all parties signing the Deed of Trust, they are all subject to the lender’s lien, and if foreclosure becomes necessary, foreclosure generally terminates all property owner’s interest in the property.
Ok, now what if the Borrowers divorce?
This is another question that is occasionally asked. What happens if a married couple separates or divorces after a loan has closed?
While every situation depends on its specific facts and applicable law, the Deed of Trust generally continues to encumber the property, and the signed Note continues to make all borrowers responsible for the loan.
Changes in ownership resulting from a divorce typically don’t change the Deed of Trust, the Mortgage Note, or the responsibility of the loan. It is possible however that divorce proceedings may affect ownership rights and create additional legal considerations depending on the circumstances.
Experienced trust deed investors often focus on loan-to-value, property value, and the borrower’s exit strategy. Those are certainly important considerations. Title, however, provides another important piece of the overall picture.
No two real estate transactions are exactly alike. Ownership structure, marital status, title vesting, and other legal factors can all influence how a loan is documented. Understanding the difference between ownership and personal liability helps to better understand how a particular transaction is structured.
In Part 2 of this newsletter “Title & Ownership Issues Trust Deed Investors Should Understand”, we’ll look at another title issue that often comes up: Entity owners (LLCs, Corps, etc.) and Personal Guarantors.
Warm regards,
Ken Walker
Broker/Owner
Pacific Direct Mortgage & Real Estate, Inc
DRE #01858042 / NMLS #1221130
Phone: 707-708-0797
Address: 1400 N Dutton Ave #22 Santa Rosa, CA 95401
Disclaimer: This newsletter is provided for general educational purposes only. It is not intended as legal, tax, or investment advice, and should not be relied upon as such. Every transaction is unique, and applicable laws may vary depending on the specific facts and circumstances. Investors should perform their own independent due diligence and consult their own legal, tax, or financial advisors before making any investment decision.
