How Does a Deed of Trust Work in Foreclosure?
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What Is A Deed Of Trust?
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Typically, when you purchase a property using a mortgage lender, the lender holds the deed (legal ownership) as security should the buyer default on the loan. In the case of a deed of trust, the deed to the property is held by a third party, or trustee. Once the balance of the loan is paid in full, the trustee then transfers ownership interest via either a trustee's deed or reconveyance to the borrower, who now owns the property free and clear.
Judicial Foreclosure
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In the event of a foreclosure, absent a third party deed of trust, a lender must follow the procedure for a judicial foreclosure before evicting the borrower and selling the property. The process of judicial foreclosure actually takes much longer than a foreclosure by deed of trust sale, entails court hearings and is treated much like any other legal proceeding.
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Deed Of Trust In Foreclosure
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In the case of a deed of trust foreclosure, the lender hands over the deed of trust to the third-party trustee and instructs the trustee to sell the property. The trustee is often a bank, escrow agent or title company; in short, a party involved in the real estate transaction who is neither the mortgagor nor mortgagee. The third party then handles the sale of the property without having to go through the legal process that a judicial foreclosure entails. (Laws relating to foreclosure methods vary from state to state; check into foreclosure laws in your state via the link in Resources.)
Trustee's Sale
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When the third-party trustee sells the property, the process is called a trustee's sale. The sale is open to the public and must be advertised for several weeks in local newspapers. At the trustee's sale, which is usually conducted at a city or county government office, potential buyers submit sealed bids. Since the lender wants to recoup its investment, it usually submits a bid for the amount it is owed. If the lender's bid is the highest, it becomes owner of the property and usually markets the property for sale through a Realtor or foreclosure sales specialist. A bank- or lender-owned property is referred to as a "real estate owned" or REO property.
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References
Resources
- Photo Credit Image via bankforeclosuresforsale.com
