Legal Question in Real Estate Law in California

Re: Promissory Notes

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Re: Promissory Notes

First of all, home owners don't "hold title" by way of a deed of trust -- ownership or title is held by means of, or as a result of, a grant deed or quitclaim deed (for example).

A deed of trust is a financing tool, allowing the holder or trustee to sell (foreclose on) the property on behalf of the lender. The deed of trust gives the trustee limited ownership rights of a very special kind -- the trustee is said to hold 'equitable title' to the property, but even that may be an overstatement.

The promissory note and the deed of trust go together as a package deal. The note represents the borrower(s) promise to repay, and the deed of trust provides the lender with collateral.

Promissory notes aren't "filed against" anyone. They aren't even recorded, although the deed of trust is. The promissory note is signed by the borrower, or if there are two borrowers, i.e. two people who are promising to repay the loan, then both must sign.

It is legally possible for one of two co-owners of real estate (joint tenants or tenants in common) to borrow on his or her partial interest alone. In such a case, only the borrower would sign the note, and only the borrower would sign the deed of trust. However, half interests in real estate aren't usually very good collateral, so as a practical matter lenders will require both co-owners to sign both the note and the deed of trust.

If the note and deed of trust are for a "purchase money" loan (rather than a refinancing), the lender cannot go after the individual borrowers anyway; the lender's only recourse is to the collateral itself. So, the added signature doesn't have a huge effect.

The bottom line is that the lender isn't required to get both signatures on the note, but if the property is co-owned, the lender will insist on both co-owners' signatures so that if a foreclosure is required, the entire interest in the collateral can be sold.

I would strongly recommend that two persons, not married to each other, who co-own or co-borrow, have a professionally-drafted contract between the two of them, spelling out in some detail their rights, obligations, expectations and goals with respect to the co-owned property.