When using a deed of trust to either fund the acquisition of real estate or secure a loan using your property as collateral, a valid trustee is a mandatory component of the process.
The majority of states that utilize deeds of trust as opposed to mortgages have statutes governing the specific prerequisites a trustee must possess.
A deed of trust is a legal tool mainly utilized during real estate transactions when either the buyer seeks to borrow money for the purchase, or when a real estate owner borrows funds and then puts their property up as collateral to secure the loan. Although the majority of jurisdictions typically use a mortgage as opposed to a deed of trust, buyers and sellers alike should research their local statutes to ensure which document is applicable. Entities such as banks, savings and loan organizations, credit unions, title insurers or real estate professionals may also be useful resources in confirming which rules apply to the situation at hand.
A deed of trust requires collaboration between three parties: the trustor (the party borrowing money), the beneficiary (the party lending money), and the trustee. The trustee retains the property’s title until the trustor has completely paid off the loan owed to the beneficiary. When the trustor’s debt is resolved, the beneficiary instructs the trustee to transfer the full property title to the trustor.
While deeds of trust are commonly referred to as mortgages, in reality the two instruments have several differences. A mortgage approach involves only two parties: the mortgagor (the party borrowing money) and the mortgagee (the party lending money). The mortgagor retains the property title and the mortgagee places a temporary lien on the property until the loan is paid in full, when the mortgagee then formally releases the mortgage.
Lenders generally prefer deeds of trust as they typically result in a less complicated foreclosure process in instances of borrower default.
Commercial lenders generally select the trustee, which is usually a title company or professional escrow entity. There are certain states that have laws in place regulating who can fill the role of trustee in a deed of trust. Typically, the trustee has to be a lawyer, title insurance company, trust company, bank, savings and loan, credit union, or other institution expressly permitted by statute to operate as a trustee. Some states have no rules at all concerning trustees, whereas Colorado has established public trustees in every county to handle deeds of trust.
If the loan is obtained via the property seller or another private entity, the parties to the transaction need to settle on a third-party who will operate as the trustee. Similar to working with a commercial lender, the parties may be able to select a title company, escrow agency, real estate professional, or lawyer in order to meet this requirement.
Regardless of whether the trustee is an individual or company, it must be ensured that the entity is reliable and can operate on an impartial basis in order to complete the requisite responsibilities.
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