Annotated document
An annotated note and deed of trust
The clauses in the loan documents that the term sheet never mentioned - default interest, acceleration, power of sale, and what a cross-default really does.
The term sheet is a summary. The note and the security instrument are the enforceable documents, and they contain terms that were never in the summary at all.
You usually see them at closing, under time pressure, which is exactly the wrong moment. Here is what to look for, annotated.
| Principal sum | $285,000, or so much as may be advanced1 |
|---|---|
| Interest | 11.00% per annum, computed on a 360-day year2 |
| Payments | Interest only, monthly in arrears, commencing 1st of month |
| Late charge | 5.00% of any payment more than 10 days late3 |
| Default interest | 24.00% per annum from the date of default4 |
| Events of default | Non-payment; maturity; insurance lapse; unpaid taxes; unpermitted work; transfer of title; breach of covenant5 |
| Cure period | Ten (10) days for monetary; thirty (30) days for non-monetary6 |
| Acceleration | Lender may declare the entire balance immediately due7 |
| Power of sale | Trustee may sell the Property at public auction8 |
| Cross-default | Default under any other obligation to Lender is a default here9 |
| Cross-collateralisation | None10 |
| Assignment | Lender may sell or assign this Note without notice11 |
| Waiver of jury trial | Borrower and Guarantor waive trial by jury12 |
| Attorneys' fees | Borrower pays Lender's costs of enforcement13 |
| Governing law | The state in which the Property is located14 |
"Or so much as may be advanced"
This is the phrase that makes a holdback work. You owe what has actually been advanced, not the face amount — which is why the accrual basis in the term sheet matters so much. If the note says interest accrues on the principal sum rather than on advances, that contradicts a drawn-balance term sheet. Raise it before signing.
↑ back to the documentA 360-day year is not a typo
Interest computed on a 360-day year but charged for 365 days means you pay about 1.4% more interest than the stated rate implies. On $285,000 at 11% for a year that is roughly $435. Standard in commercial lending, rarely explained, and it is one reason the effective rate always exceeds the quoted one.
↑ back to the documentLate charges compound the problem they punish
5% of a $2,613 interest payment is $131. Minor on its own; the risk is that a late payment can also trip an event of default, which is not minor at all.
↑ back to the documentDefault interest is the real penalty
24% on $285,000 is $5,700 a month, against $2,613 at the note rate. Ask specifically from what date it runs — some notes apply it retroactively to the date of default rather than from the expiry of the cure period.
↑ back to the documentMost defaults are not missed payments
Look at that list. Letting hazard insurance lapse, missing a property tax instalment, doing work without a permit, or transferring title into another entity for tax reasons are all events of default here. Investors trip these far more often than they miss a payment.
↑ back to the documentA cure period is the most valuable thing you can negotiate into a note
Ten days monetary and thirty non-monetary is reasonable. No cure period at all means a technical breach can accelerate the loan the same day. If the note is silent, ask for one in writing — this is a far more valuable concession than a quarter point.
↑ back to the documentAcceleration turns a small problem into the whole balance
Once accelerated, you no longer owe this month's interest — you owe $285,000 now. This is the mechanism by which a lapsed insurance policy becomes a foreclosure.
↑ back to the documentPower of sale means non-judicial foreclosure
In deed-of-trust states this lets the lender foreclose without going to court, in a few months rather than a year or more. Whether your state uses mortgages or deeds of trust materially changes how much time you would have. Ask a local attorney which you are in.
↑ back to the documentCross-default is easy to miss and hard to undo
If you have more than one loan with the same lender, a default on one is a default on all. Fine when everything is fine. When one project goes wrong it can take the others with it.
↑ back to the documentCheck this line says "None"
If it names another property, the lender has a lien on an asset that has nothing to do with this project. That can be a reasonable trade for leverage, and it is never a casual signature. Read this first.
↑ back to the documentYour loan may be sold, and the buyer may be less flexible
The lender who promised to work with you may not be the party you deal with in month ten. This is normal and generally not negotiable, but it is a reason not to rely on verbal assurances about extensions.
↑ back to the documentJury waivers are standard and still worth knowing about
Disputes go to a judge, or to arbitration if specified. Enforceable in most states, occasionally not. Not usually a reason to walk, but you should know you signed it.
↑ back to the documentYou pay for the fight either way
Standard, and one-directional in most private lending documents. Ask whether it is reciprocal — a prevailing-party clause is a fairer version and some lenders will agree to it.
↑ back to the documentGoverning law is usually the property's state
Which is what you want, because that is the law your attorney knows and where the collateral sits. If the note specifies a different state, ask why.
↑ back to the document
Have a real estate attorney in the property's state read these documents. This page will help you ask better questions; it is not a substitute for that, and it is not legal advice.
The single most valuable question you can ask before closing: what is the cure period, and from what date does default interest run?