It might seem like mortgages and home loans always go together: Take out a home loan, and you’re getting a mortgage. But that’s not always accurate. In many states, mortgages aren’t used, and a home loan is instead secured with a deed of trust.
What Is a Deed of Trust?
A deed of trust is a legal instrument that gives a lender security for a home loan. If the borrower doesn’t repay the loan as agreed, the deed of trust allows a third-party trustee to sell the home on the lender’s behalf. That gives the lender a way to get its money back in case of default.
What’s the Difference Between a Deed of Trust and a Mortgage?
A deed of trust and a mortgage are very similar. Both put a legal claim on property purchased with a home loan so that it serves as collateral.
There are a few differences between them, though. First, there are typically two parties to a mortgage: the borrower and the lender. In contrast, three parties enter into a deed of trust: the borrower, the lender and a trustee, which is usually a title or escrow company.
A deed of trust and a mortgage can also differ in who has title, or who ultimately owns the property. For mortgages in most states, the borrower holds legal title to the property and grants the lender a lien against it. If the borrower defaults on the loan, the lender must usually go to court to foreclose and get title to the property. This judicial foreclosure process can take several months or even years.
In most states with a deed of trust, the borrower grants the trustee title to the property. The trustee holds the home in trust for the borrower to use and live in. In a few states, the borrower grants the trustee a lien on the property. With a deed of trust, the lender almost always has the option of nonjudicial foreclosure. This allows the trustee to sell the property for the lender without going through the court system. The lender still has to notify borrowers that they’re in default and give them time to bring their loan current, but the process can be completed in much less time than a judicial foreclosure.
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How a Deed of Trust Works
When you take out a home loan with a deed of trust, you sign the deed of trust along with the lender and the trustee. The trustee is a third party that’s usually chosen by the lender.
“They’re generally companies that do these types of transactions on a regular basis. So a trust company or a title company would serve as generally that third-party trustee,” says Samantha McCarthy Jarvis, founding attorney and CEO at McCarthy Law.
An attorney or a bank or credit union could serve as the trustee in some cases.
In most states, you are giving the trustee the legal title of the property to hold onto. However, you still have the right to live in the property and benefit from it, and the trustee has to give you the title once you pay off your loan.
“I don’t want people freaking out because whenever I tell them, ‘Hey, you’re conveying your property to a trustee,’ they’re like, ‘Well, no, I don’t want to do that.’ And it’s like, ‘No, they’re holding it in trust. This is just how it’s done. It’s really nothing to worry about,'” says Patrick MacQueen, founding attorney at Medalist Legal.
After closing, the trustee’s role is largely a formality unless the borrower defaults on the loan.
“They’re not necessarily doing a lot other than keeping in touch with the lender to make sure you are in fact satisfying your mortgage payments,” McCarthy Jarvis says.
When you pay off your loan, the lender notifies the trustee that you’ve satisfied the debt. The trustee then issues a deed of reconveyance, which transfers the title to you or removes the lien on the title. The trustee may record the deed and give you a copy, or you may receive the original and have to get it recorded yourself. You won’t have clear title to the property if the reconveyance isn’t recorded, so make sure this is done.
“That will be within the chain of title and it’ll be a public record that this deed is no longer in effect, and that will be it,” says Eric Teusink, managing partner at Williams Teusink law firm.
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Foreclosure With a Deed of Trust
Deeds of trust generally contain a power-of-sale clause, which gives the trustee the right to sell the property if the borrower stops repaying the loan.
“Anytime a lender says to the trustee, ‘Hey, this borrower is not paying me. I need you to utilize or enforce the power of sale in my deed of trust that is acting as security,’ that’s really when the trustee steps in,” MacQueen says.
Once a borrower is 45 days overdue on the home loan, the servicer sends a notice of delinquency letting the borrower know the amount they need to pay to bring their loan current. At 90 days, the servicer sends a demand letter stating that it intends to accelerate the loan. The borrower now has 30 days to correct their default.
Once 120 days have gone by, the trustee can initiate foreclosure.
The trustee then schedules a sale. State laws typically require the trustee to inform the borrower that a sale is going to take place and to advertise the sale in a newspaper for at least a few weeks. The home is then sold at auction.
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How to Tell if You’re Getting a Mortgage vs. a Deed of Trust
Your loan packet will show which of these two instruments applies to your transaction. You’ll be asked to sign a promissory note for your home loan, plus either a mortgage or a deed of trust. You can also ask your lender whether a mortgage or deed of trust will be used.
“It’s never a bad idea as a consumer to be asking that question and saying, ‘Can you please explain to me the different legal documents that are going to be associated with this transaction?’ And also to understand at what point do you actually get title to the property,” McCarthy Jarvis says.
If you’ve already taken out your home loan, you can find the information in your closing documents. Alternatively, you can call your servicer or check with your local government’s recorder of deeds.
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What Is a Deed of Trust? originally appeared on usnews.com
