What Is a Deed of Trust?
When purchasing real estate with a mortgage or loan, or, alternatively, funding the sale of a property you own, signing a deed of trust is commonly a mandatory step of the closing process. A deed of trust is a legal instrument used to secure a real estate loan that is recorded with the local recorder or title registrar. Generally, the lending organization providing financing for the underlying transaction prepares the deed of trust.
Deed of Trust vs. Mortgage Agreement
In some jurisdictions, a deed of trust is used in place of a mortgage. A mortgage agreement establishes a lien against the associated property, offering the lender protection in cases of borrower default. Although both a deed of trust and a traditional mortgage agreement function as a security interest for the lending entity in the real estate, the lender does not hold the security interest when using a deed of trust. A mortgage agreement is formed between two parties—namely the borrower and the financial institution.
Alternatively, when a deed of trust is used, a third-party trustee is designated to retain the equitable title to the real property secured by the deed until such time that the borrower pays off the loan. Deeds of trust are used along with promissory notes. The deed of trust provides the security for the loan balance and is subsequently secured by the actual property. The deed of trust then subsequently secures the promissory note, which details the interest rate, the terms of repayment, and the borrower’s promise to repay the lender the total of the loan in addition to interest. The lender holds the promissory note until the loan is fully repaid by the borrower.
Who Is Involved with a Deed of Trust?
Deeds of trust involve three parties: the trustor (borrower); the lender; and the trustee. The trustee is an independent third party responsible for holding legal title to the property. They have the power to foreclose on the real estate in the event the borrower defaults. If all terms of the loan agreement are fulfilled, then the trustee legally transfers ownership of the property back to the buyer/owner who then possesses equitable title to the real estate. In cases where the borrower fails to fulfill their contractual obligations of loan repayment, the trustee has the authorization to take legal action on behalf of the lending party. These actions are explicitly stated in the deed of trust instrument, subject to state law, typically including the following:
- Filing or mailing notices of default for public record;
- Publishing notices of default or sale in legal periodicals for a specified timeframe;
- Taking any other actions as required by the laws of the given jurisdiction.
After these actions have been taken, the trustee is obligated to sell the property as opposed to going through the formalized judicial foreclosure process. The trustee then distributes the sales proceeds to repay the lender for the outstanding debt.
Some jurisdictions are known as “mortgage states” in which deeds of trust are not used in real estate transactions. In other jurisdictions, state law mandates that a deed of trust is used in all instances where the buyer is obtaining a mortgage to fund their real estate purchase. Some states allow for the use of either a mortgage or deed of trust based on the parties’ preference. From a lender’s perspective, using a deed of trust may be a more favorable option as it enables them to avoid the lengthy and costly judicial foreclosure process in case there is a borrower default.
More Information on Deeds of Trust
If you have any questions about whether the state you are lending in requires a mortgage or deed of trust, Geraci Law Firm is here to help. Our experts can advise whether to use a mortgage or deed of trust along with any other structural advice to move the foreclosure process forward, including pledges of ownership in the borrowing entity or securing the business assets as additional security. When there is an actual default under your loan, we can advise on receiverships, deeds in lieu of foreclosure, modifications, forbearances, foreclosure, or any other loss mitigation strategy you may choose to proceed. Our foreclosure team is able to act as trustee in California and facilitate the foreclosure process on deeds of trust in the state.