Deed of Trust
What Is a Deed of Trust?
A deed of trust, or a trust deed, is a secured real estate transaction agreement between a borrower and a lender to use a neutral third-party as a trustee. This person or entity does not represent either the borrower or the lender. The trustee holds the property until the borrower pays off the debt. During this time, the trustee maintains ownership of the property and is responsible for the premises.
Once the borrower pays off the debt, the trustee distributes the proceeds to the lender. The borrower receives any additional funds and the trustee then transfers the property to the borrower.
By law, some states require deeds of trust whenever a buyer needs to borrow some or all of the money for a property. If you are a lender who needs to craft a trust deed, it is important to work with an experienced deed of trust legal expert. There is a lot of information to include, and it is best to ensure you do not miss anything.
Deed of Trust versus Mortgage: What is the Difference?
Trust deeds involve three parties: the borrower, the lender and the trustee. The trustee acts as a neutral middleman between the borrower and the lender. Mortgages only involve two parties: the lender and the borrower. The borrower pays the lender instead of going through a third-party.
For both mortgages and deeds of trust, the lender has a security interest in the property in case the borrower does not pay the amount owed. However, in the case of a deed of trust, the lender does not hold the security interest; the trustee holds it.
Deed of Trust Transfers
If the borrower is moving out of the property and needs the deed of trust transferred to the buyer, then the county recorder or clerk receives and files the new information. Transferring one is a straightforward process, similar to how one would transfer a mortgage to a new buyer. However, failure to record the documents may invalidate the transfer.
Deed of Trust Foreclosures
In states that use deeds of trust instead of mortgages, non judicial foreclosures are more common. This means that if the borrower does not pay the debt, the lender can move forward with the foreclosure process without going to court. When a borrower defaults on a loan, the trustee may sell the property to recover as much of the loan as possible in order to pay the lender. There is usually a foreclosure timeline. Check with your state to verify time limits for the different notices, such as the pre-closure notice, the notice of default and the notice of trustee sale.
What the Deed of Trust Process?
Step 1: Find Out if One Is Required
Some states are mortgage states, meaning one needs to pursue a mortgage agreement between the lender and the borrower. Some states allow both deeds of trust and mortgage agreements while others only allow deeds of trust. You need to find what your state requires.
If you have the option to choose between a mortgage agreement and a deed of trust, then you need to carefully consider what is in your best interest. The main difference between the two is the foreclosure process.
Step 2: Understand What Needs to Be Included in the Deed of Trust
Trust deeds are legal documents that require specific information from the lender, the borrower and the trustee. Here is some information to include in a deed of trust form:
- The original loan amount
- The start date of the loan
- The legal description of the property
- Additional property information including floor plans or diagrams
- Those involved in the transaction: the lender, trustor (borrower) and trustee
- The terms and conditions of the loan
- Late fees: What is the charge for late payments
- The penalties involved when not meeting the terms and conditions of the loan
- Acceleration and alienation clauses: this allows the lender to require immediate full payment of the loan under certain circumstances
- Adjustable-rate mortgages (ARMs): terms and conditions
- Other riders, if any, regarding prepayment penalties or other terms
These are just some things included. For this reason, it is important to work with an attorney to ensure you do not leave any information out.
Step 3: Work with an Attorney to Craft a Form
You should not take the crafting of a deed of trust lightly. Mistakes could mean prolonging the process and costing you money down the line. Experienced real estate attorneys know what to include in a deed of trust, meeting all the legal requirements for your state.
Your attorney will walk you through the process and answer any questions you may have. He or she will also handle issues that may arise from the borrower or the trustee.
Step 4: Get all Parties to Sign
Before signing off on the deed, read it carefully. You need to review the following items:
- The spelling of names
- The interest rate
- The principal balance of the loan
- Any riders added
- ARMs rider
- Payment amount
- Any penalty wording
- Address of the property
After all parties read over the deed, you need to get the trustor and the trustee to sign it. If there is any pushback from the borrower about making changes to the deed of trust, then make sure you consult your attorney.
Work with an Experienced Local Lawyer Today
If you are a lender that needs to create a deed of trust, then it is important to understand how they work, how to craft one and why you need an attorney’s help along the way. You don’t want to leave anything up to chance as it will only prolong the process and cost you money.
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