When you buy a home, you typically have a mortgage or deed of trust. A deed of trust involves three primary parties:
- A borrower (sometimes called a “trustor”),
- A beneficiary (your lender), and
- A trustee (a neutral third party who holds your property until the loan is paid in full).
During repayment, you retain possession of the property and are responsible for its upkeep and maintenance. However, the lender can foreclose on your property if you default on the loan.
When you enter into a loan, you sign a promissory note. A trust deed transfers the lender’s interest in your property to an impartial trustee (typically a title company). The trustee holds onto this interest until you fulfill your promissory note’s terms (such as paying the loan in full).
Once your loan is repaid, the trustee will transfer the title to you (the borrower) through a deed of trust transfer. However, if you miss a payment or violate the terms of your loan, the trustee will begin the foreclosure process.
Mortgages and deeds of trust are similar in many ways. Both documents pledge an interest in real property to secure a loan. And, they both allow a party to foreclose on the property if the borrower defaults on the loan.
However, there are significant differences:
- Mortgage: There are two parties involved (the lender and the borrower). And, the lender must pursue a judicial foreclosure through the court system.
- Deed of trust: There are three parties to the agreement (as discussed above). If the borrower defaults, the trustee typically uses a non-judicial foreclosure to recover the property.
To determine whether you have a mortgage or deed of trust, you need to examine your loan documents. These documents should set out the structure of your loan and its terms and conditions. If you need help understanding these documents, you can contact your lender or a real estate lawyer.
If you do not make your monthly loan payments, your trustee can initiate a “power of sale” foreclosure. Unlike a mortgage foreclosure, which involves judicial proceedings, the lender does not need court approval before authorizing the sale of your property.
However, the trustee must follow your state’s real estate laws and the terms of your deed of trust. For example, if your deed of trust gives you a “right of redemption” (a grace period allowing you to catch up on late payments), the trustee cannot sell your property during that period of time.
Not all states permit deeds of trust. You might have a deed of trust if you live in:
- North Carolina,
- Virginia, and
While deeds of trust are very helpful to lenders, they also result in many title and other disputes. If you have questions about a deed of trust, you should contact a real estate lawyer for help. Deeds of trust and other loan documents are highly technical and difficult to understand. Without the help of an experienced lawyer, you might make costly mistakes and lose your real estate.