Definition of Deed of Trust
A Deed of Trust is Not Used in Every State
Most buyers sign a deed of trust at the closing table, along with a ton of other documents. The amount of paperwork home buyers sign at closing is astounding. By the time a buyer signs the deed of trust, it can become just one more piece of paper, although it is considered, coupled with the prom note, to be the most important.
Most of those documents will be generated by the buyer's lender. By signing without reading, it can take buyers almost an hour to finish.
Although, every once in a while, I will attend a closing with buyers who actually take time to read the documents, and that is refreshing. It is perfectly OK to spend time asking questions about paperwork that could take you 30 years to repay.
What is a Deed of Trust?
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 can comprise many pages and I've never seen any buyers actually read the entire document except for a few lawyers.
I've discovered that often when lawyers absorb every single word, it's because the lawyer invariably might elect to change a paragraph or a sentence or a word, and bottom line, that is not done. If the borrower wants the loan from that particular bank, the borrower agrees to sign the deed of trust set forth before the borrower.
But I can certainly understand why a lawyer might object to certain portions of the deed of the trust.
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 entity with the money, 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 to the instrument
- Inception and maturity date of the loan
- Provisions of the mortgage and requirements
- Late fees
- Legal procedures in the event of default
- 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 a major circulation paper, 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, which 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. Until the loan is paid off, the borrower has only a copy for her records.
Before Signing a Promissory Note and Deed of Trust
Read both documents, including the pre-printed portions. You might ask the closer to send you a blank deed of trust and promissory note beforehand. Because preparers are human and can make mistakes, here are the important items to review:
- Spelling of trustors' names
- Principal balance of the loan
- Interest rate (and the rider, if adjustable)
- Payment amount
- Prepayment penalties, if any
- Address of the property
Also, don't use a particular lender because you want to make mortgage payments to that lender. The likelihood is your loan will be sold shortly after closing in the secondary mortgage market.
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.