A borrower, lender, and trustee get into an agreement called as a Credit Line and Construction Deed of Trust Agreement for the loan that the borrower has taken from the lender. As we know, financial institutions require security when they decide to give a credit line. It is also important to put obligations of borrower on the contract. While Credit Line works in favour of the borrower, Deed of Trust works in favour of the lender.
Trustee, however, remains neutral and impartial as he holds a huge responsibility on his shoulder. A lender makes sure that if the borrower fails to pay the loan, it can sell the property or completely own it with the help of a trustee. In this agreement, interest, rent, and all other benefits of the property during the period of the loan are also owned by the lender.
When Is Credit Line and Construction Deed of Trust Agreement Needed?
The Credit Line and Construction Deed of Trust Agreement is needed when the lender wants to secure the credit line it has provided to the borrower. It also consists of the details and rules of the Credit Line. As we discussed above, credit line allows the borrower to take out credit from total loan whenever they require and interest will be paid only on that. Further, when the borrower repays, credit gets updated and can be drawn again until the loan expires.
Purpose of The Credit Line and Construction Deed of Trust Agreement:
- To secure the amount lent by the lender
- To securing obligation arising out of a promissory note
- To keep the records of all-important details and terms and conditions
- To lay down details about interests
- To keep the record of the lien priority list
- To opt for Non-Judicial Foreclosure
Inclusions in Credit Line and Construction Deed of Trust Agreement?
The Credit Line and Construction Deed of Trust Agreement will have the names and other important details of lender, borrower, and trustee. It will have the details of loan that has been obtained, mode of credit, and period of credit. It will also have details of the property that has been put as security for a trust deed. It is paramount to put all other important details of that property such as addresses, state details, rental income, tax on it, etc.
Most importantly, this agreement will have all the details of borrower’s obligations. What happens when the borrowers make entire repayment on time, what happens when he doesn’t, what happens when the property needs to be sold by the trustee to make the payment, in what situation will the property be sold, what are the interest details, etc. are few questions that the agreement must answer.
How to Draft the Credit Line and Construction Deed of Trust Agreement?
To draft the agreement, it is important to first understand major rule and definitions, for instance, one must know the difference between a deed of trust and mortgage. While the process of loan benefits the borrower and provides relief, it also contains risk. So, it is essential for the borrower to be fully aware of the risks and conditions. The agreement should always be drafted in a way that in future it doesn’t create discontentment.
- First step is to add basic information
- Mention about all the obligations involved
- Mention the value of the property
- Clarity on the clauses such as sale clause
- Mention the time period of the loan
- Mention the details of the foreclosure sale
- A priority list of the lien
Benefits of Credit Line and Construction Deed of Trust Agreement
Like any other agreement, Credit Line and Construction Deed of Trust Agreement also helps to increase security and reliability. In addition, for the borrowers, it gets easy to get a big amount of loan with less interest rate, and for the lender, it becomes more secure to provide the loan or credit line.
Pros of Credit Line and Construction Deed of Trust Agreement:
- Non-Judicial foreclosure
- Rapid foreclosure
- Interest only on the borrowed money
- Credit line is flexible
- Involvement of trustee
- No involvement of the local court
Cons of Credit Line and Construction Deed of Trust Agreement:
- Foreclosure risk
- Property sale risk
- Risk of irresponsible borrowing
- Registered in the public register
[Also Read: Deed of Trust]
Key Clauses in The Credit Line and Construction Deed of Trust Agreement
Before drafting an agreement, both the lender and borrower should take note of some of the key clauses. Especially at the time of breach or default, clauses play a huge role. It becomes a liability for both the trustee and lender to tackle failure in the repayment. If the sale happens, it is also important that the borrower gets his remaining money fairly.
- Granting clause
- Sale clause
- Dispute resolution
- Priority details
What Happens in Case of Violation?
In case the borrower fails to pay, as mentioned above, the trustee holds full rights over the security provided by the borrower. The property can be sold by the trustee to pay the lender and to satisfy the debt. But borrowers also have a say if the trustee doesn’t act neutral. All states require the trustee to end it fairly for both the borrowers and lenders. The trustee can’t favour one of them.
Sample Credit Line and Construction Deed of Trust Agreement
It’s a very important document that protects both the lenders and borrowers. It’s suggested that one should take the help of an expert while drafting it. Here is a sample drafted by our experts.
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