Buying a home is a complex process with lots of paperwork and transferring of rights. When you borrow money from a bank to purchase a home, which most people do, part of your repayment agreement outlined in the promissory note is that the lender can repossess the home if you fall behind in your monthly payments.
The promissory note is a written document that contains the details of your repayment plan, like the interest rate, payment amount, and penalties. While the promissory note is a legal contract that you’re expected to uphold, the promissory note alone isn’t enough to allow the lender to repossess your property if you fall behind on payments. The deed of trust is a document that, combined with the promissory note, establishes a lender as the lien holder on a piece of property and enables the foreclosure process if you default on payments. A deed of trust is one of several documents you’ll sign at home closing but it’s only used in certain states.
Parties Involved With the Deed of Trust
The deed of trust has three parties involved. The homebuyer (you) is the trustor, the lender is the beneficiary, and a third-party is a trustee who should have no interest in the property and no bias toward you or the lender. The trustee is usually an attorney, escrow company, or a title insurance company. In some states, the trustee may actually hold the legal title as long as the deed of trust is in effect.
The role of the trustee is to start foreclosure proceedingsafter the lender has shown proof that you’ve fallen behind on your payments. As long as you’re current on all your
payments, you’ll never really know the trustee is involved in the process.
Once you’ve paid the loan in full, the deed of trust is cancelled or released. The mortgage company may have to file a Release of Deed of Trust to have the lien released from the property that you now own free and clear.
Deed of Trust vs. Mortgage
A deed of trust is only used in home purchases in some states. Other states use a mortgage. Most people refer to the loan that’s used to purchase a home as a mortgage. However, the mortgage is really a document that’s very similar to the deed of trust. The mortgage establishes the lender as the lien holder on a piece of property. There’s no trustee listed on mortgage documents; only the mortgagor (borrower) and the mortgagee (the lender) are listed. In states where a mortgage is used, the foreclosure process goes through the court system. Getting a court-ordered foreclosure gives the lender the right to collect a deficiency judgment if the foreclosure sale doesn’t result in enough money to satisfy the outstanding balance.
Where a deed of trust is involved, the trustee has the power to sell the home without getting a court order once the homeowner becomes delinquent on payments. While the trustee has the option of selling the home without going through the court system, some state laws allow the trustee to go through the court in order to get a deficiency judgment. In a trustee foreclosure sale, the sale is final; there is no “right of redemption.” But, when the foreclosure process goes through court, the borrower can repay the lender and regain their right to the property.
Unfortunately, the only power you have over whether a mortgage or deed of trust is used in your home purchase is by choosing a state that uses the document you prefer. Of course, if you don’t become delinquent on your payments the difference in the documents never matters.