The Hutchens Blog

The amount of paperwork home buyers sign at closing is astounding. Most of those documents will be generated by the buyer’s lender. One of them is the trust deed or deed of trust. It is the document wherein specific financial interest in the title to real property is held by a trustee, which holds it as security for a loan. When the loan is fully paid, the monetary claim on the title is transferred to the borrower. If the borrower defaults on the loan, the trustee has the right to foreclose on and transfer title to the lender or sell the property to pay the lender from the proceeds.

If you have never read a deed of trust, you might have questions about it. After all, it is the security for your loan. It is the document that is recorded in the public records.

A deed of trust contains three parties:

• The Trustor, which is you, the borrower
• The Trustee, which is an entity that holds “bare or legal” title
• The Beneficiary, which is the lender

The deed of trust is an instrument that identifies the following:

• Original loan amount
• Legal description of the property being used as security for the mortgage
• The parties
• Inception and maturity date of the loan
• Provisions of the mortgage and requirements
• Late fees
• Legal procedures
• Acceleration and alienation clauses
• Riders, if any, regarding such clauses as prepayment penalties or terms of an adjustable rate mortgage

What is a Trustee?

Because mortgages do not contain a trustee, many borrowers are confused between a mortgage and a deed of trust. Deeds of trust contain a trustee, an independent third party that does not represent the borrower nor the lender.

• The trustee is an entity, generally a title company, that holds the “Power of Sale” in the event of default.
• The trustee also reconveys the property once the deed of trust is paid in full.
• In the event of a default, the trustee files a Notice of Default; however, in most instances, the trustee will substitute another trustee to handle the foreclosure under a Substitution of Trustee.
• After the 90-day period in the public records, and a 21-day publication period in the newspaper, the trustee then has the power to sell the property on the courthouse steps without a court procedure.
• During the three months following recordation of the Notice of Default, the borrower can redeem the property by making up the back payments and paying the trustee’s fees.
• Once the trustee sells the property at a Trustee’s sale, it is final.

What is a Promissory Note?

Whereas the deed of trust is security of the debt, secured by the property, the promissory note is secured by the deed of trust and is the evidence of the debt.

• The promissory note is a promise to pay, signed by the borrower in favor of the lender.
• It contains the terms of the loan such as the interest rate and payment obligations.
• The promissory note is generally not recorded.
• When the loan is paid, the promissory note is marked “paid in full” and returned to the borrower, along with a recorded Reconveyance Deed.
• During the term of the loan, the lender retains the promissory note.

Trust deeds are the the most common instrument used in the financing of real estate purchases in Alaska, Arizona, California, Colorado, Idaho, Illinois, Mississippi, Missouri, Montana, North Carolina, Texas, Virginia, and West Virginia whereas most other states use mortgages. Deeds of trust can also be for loans made for other purposes but where real estate is used for collateral.