When buying real estate with borrowed money, or financing the sale of real estate you own, a deed of trust may be one of the required documents you will sign at closing.
A deed of trust is a legal document that is the security for a real estate loan. The document itself is recorded with the county recorder or registrar of titles in the county where the real estate is located.
When a deed of trust is required by state law, it is just one of many forms the parties sign at the real estate closing. Typically, the deed of trust is prepared by the lender, who is agreeing to put up money to finance the buyer's purchase.
In some states, a deed of trust is used instead of a mortgage. A mortgage agreement creates a lien against the real property, protecting the lender from a situation where the borrower defaults on their obligations. While both a deed of trust and a mortgage provide a security interest for the lender in the property, the lender does not hold the security interest as is the case in a traditional mortgage. A mortgage agreement is between two parties: the borrower and the lender. With a deed of trust, a third-party trustee holds the equitable title to the real property secured by the deed.
Deeds of trust are used in conjunction with promissory notes. The deed of trust is the security for the amount loaned to finance the real estate purchase, and is secured by the underlying piece of real estate. The deed of trust is what secures the promissory note. The promissory note includes the interest rate, the payment amounts and terms, and the buyer's promise to pay the lender the amount borrowed plus interest.
The promissory note is held by the lender until the loan is paid in full, and generally is not recorded with the county recorder or registrar of titles (sometimes also referred to as the county clerk, register of deeds, or land registry) whereas a deed of trust is recorded.
There are three parties to a deed of trust, as opposed to a traditional real estate mortgage in which the parties are simply the borrower and the lender. A deed of trust includes the following parties:
In some cases, there is a fourth party to a deed of trust, known as a guarantor. This is someone else who signs along with the trustor, providing another avenue for the lender to be repaid in the event the borrower defaults on their obligations.
The trustee retains the right to sell the property if the trustor (borrower) defaults on their obligations under the agreement. If the terms of the loan are met and the buyer meets their obligation, then the trustee transfers/reconveys ownership of the property to the buyer who will then hold equitable title to their property.
Some states are "mortgage states" that do not use deeds of trust. In other states, state law requires the use of a deed of trust whenever the buyer is borrowing some or all of the money needed to finance their purchase of real estate. In approximately 15 states, either a mortgage or a deed of trust may be used to secure the lender's interest in a real property transaction.
From the lender's standpoint, using a deed of trust may be preferable because doing so allows them to legally sidestep what can be a time-consuming and expensive judicial foreclosure process, if the borrower defaults on their loan payments.
While this article focuses on deeds of trust being used for the initial purchase of real estate, they may also be used for other types of loans and contracts when the real estate will serve as collateral for the loan or performance of the contract.
A deed of trust should include key information about the transaction. As with any legal document, it is important to ensure this information is accurate before signing a deed of trust at closing. Deeds of trust typically include the following components:
If the borrower does not follow through with their obligation to make payments as specified in the agreement, then the trustee is authorized to take legal action on behalf of the lender. These provisions will be spelled out in the deed of trust, and are governed by state statutes. The trustee may substitute another trustee in their place to handle the foreclosure process.
Regardless of who is serving as trustee—whether it is the original trustee or a substitute trustee for the foreclosure—the required legal formalities must be met. The trustee is responsible for taking the following actions when the buyer defaults:
When those requirements have been met, the trustee is authorized and required to sell the property at a trustee's sale without going through a formal judicial foreclosure process. Any such trustee's sale must be neutral, without benefiting either the trustor or the trustee. Trustee's sales are binding and final.
The trustee must then distribute the proceeds, with the lender having a right to the proceeds up to the amount of the unpaid loan and the buyer receiving the remainder.
The buyer does retain certain rights during the foreclosure process, before the trustee's sale. For example, after the trustee records a notice of default with the county, the borrower has a certain period of time (as specified by state law) to reclaim the property by making all required payments and paying any fees imposed by the trustee. The time period for the power of sale provision varies from state to state, ranging from two weeks to four months or more.
Before you sign a deed of trust, it is important to understand what you are signing. You should know what your obligations are, and what the trustee's rights are, under the agreement. You should also double check:
When you are ready to sign a deed of trust, the parties will need to sign in the presence of a notary public. This documents that the parties' signatures were authentic.
The deed of trust must then be recorded with the county where the property is located, and each of the parties (the trustor, trustee, and lender) should keep a copy of the recorded document.
Understanding what a deed of trust is and how it works is important for anyone involved in a transaction where a deed of trust will be used instead of a mortgage agreement. LegalNature can help you with all of your legal form needs. Let us help you get started today. Click here to create your deed of trust now.