When a person buys a home, they are typically either assigned a mortgage or a deed of trust. A deed of trust involves three primary parties:
- The borrower: This is the party who is borrowing the money and is sometimes referred to as a “trustor”;
- The beneficiary: Otherwise known as the lender (e.g., a bank or other financial institution); and
- A designated trustee: A trustee is usually a neutral third party who holds the property until the loan is paid in full.
During the repayment period, a borrower retains possession of the property and will be responsible for its upkeep and maintenance. Borrowers need to be careful though because a lender can foreclose on the property if a borrower defaults on the loan.
How Does a Deed of Trust Work?
When a borrower enters into a loan agreement, they must sign a promissory note. A deed of trust transfers the lender’s interest in the property to an impartial trustee (typically a title company). The trustee then keeps this interest until the borrower fulfills the terms of the promissory note, such as repaying the loan in full.
Once the loan is repaid, the trustee will transfer title to the borrower through a deed of trust. If the borrower misses a payment or violates the terms of the loan, however, the trustee will take total control of the property and begin the foreclosure process.
What is a Mortgage?
A mortgage is a type of interest that attaches to the property and serves as collateral for the repayment of a loan that a person borrowed from a bank or other financial institution in order to purchase the property.
A mortgage only involves two parties, as opposed to three. These parties usually include the prospective buyer (i.e., the borrower) and the lender.
Additionally, a mortgage also involves two documents. These are the promissory note and the actual mortgage document.
The promissory note is a type of legal contract that basically states that the borrower promises to repay the lender an agreed upon amount of money. The mortgage document acts as a lien on the property that permits the lender to sell the property in the event that the borrower defaults. This ensures that the lender will be able to get their money back.
How are a Deed of Trust and a Mortgage Different?
Deeds of trust and mortgages have many similarities. Both documents pledge an interest in real property in order to secure a loan to purchase the property, and both allow a party to foreclose on the property if a borrower defaults on the loan.
Despite having several similarities, there are some significant differences between the two, such as the following:
- Mortgages: As previously mentioned, mortgages only involve two parties, include two separate documents, and the lender gives the title of the property directly to the borrower. Also, in the event of the borrower defaulting on their loan, the mortgage lender must pursue judicial foreclosure through the court system; and
- Deeds of Trust: In contrast, a deed of trust involves three parties to the agreement and the property title is held by a third party (i.e., the trustee). In this instance, if the borrower defaults, the trustee typically uses a non-judicial foreclosure to recover the money borrowed to purchase the property.
Additionally, whether a deed of trust or mortgage is used will depend on the laws of the state. Mortgages are more common, however, than deeds of trust.
How Do I Determine Whether I Have a Deed of Trust or a Mortgage?
Whether a person has a deed of trust or mortgage only becomes important when the issue of foreclosure arises. To determine whether a person has a deed of trust or mortgage, they will need to either review the terms of their loan documents, contact their loan service provider, or visit their local land records office to find the document they recorded.
A more efficient way to determine the type of document that the borrower holds is to contact a local real estate lawyer for assistance. Not only will they be able to tell someone what document they have, but also what the terms set out in the document mean. Consulting a lawyer can also help to ensure that the document is properly defined.
What Does“Power of Sale Foreclosure” Mean?
A power of sale foreclosure, also known as a non-judicial foreclosure, is when a lender sells the borrower’s property in order to recover any losses that resulted from the borrower defaulting on their loan.
This type of foreclosure does not require the supervision or authorization of a court. Thus, the sale of the property tends to happen more quickly than in judicial foreclosure actions. It is important to note, however, that not every state recognizes power of sale foreclosures.
Also, in states that do allow power of sale foreclosures, the procedure typically must follow the instructions that were set out in the deed of trust document or contract.
For example, if the deed of trust gives the borrower a “right of redemption” (i.e., a grace period that allows them to catch up on late payments), then the trustee will not be allowed to sell the property during that period of time.
Which States Allow Deeds of Trust?
As discussed above, not all states permit deeds of trust. You may have a deed of trust if you live in any of the following states:
- District of Columbia;
- North Carolina;
- Washington; or
- West Virginia.
Do I Need a Lawyer for Help with Deed of Trust Issues?
While deeds of trust may be very helpful to borrowers, they also can result in many complicated legal issues, such as title disputes. Therefore, if you have any questions or concerns involving a deed of trust instrument, then you should contact a local mortgage lawyer for assistance.
A qualified mortgage lawyer will be able to provide further legal advice regarding what laws apply in your state and whether you should use a deed of trust or mortgage to borrow funds.
Additionally, they can also help you to resolve any disputes that arise and guide you through any foreclosure actions that you may be facing.