What Is a Deed of Trust & Why Is It Needed?
A deed of trust is an agreement between several parties for the successful repayment of a home loan. Many states in the United States accept both a deed of trust arrangement and traditional mortgage for the purpose of creating home loans. A deed of trust is particularly necessary when property is purchased between friends or business associates. This allows a third party to control the loan without any evidence of impropriety.
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Deed of Trust and Real Estate
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A deed of trust functions in a similar fashion to a mortgage in that a deed of trust is a loan for the purpose of purchasing a home. What differentiates a deed of trust from a mortgage is the interest of a third party in the collection of payments on the home loan. In a deed of trust, the lender and the borrower agree to transfer interest in the real property to a neutral third party, also known as a trustee.
Who Holds the Deed?
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In a deed of trust, the title of the property is held by the trustee for the lender. The borrower makes payments to the lender who communicates timely payment to the trustee. This allows the borrower to remain in possession of the property and also retain any equity available in the home. This differs from a mortgage in that the lender holds the title of the property until the borrower has paid back the home loan in full.
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Terms of the Trust
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A deed of trust is similar to a mortgage in that it has a fixed interest rate and terms of repayment. This is where the similarities end. The terms of a deed of trust also empower the trustee to take possession of the property should the borrower default on the home loan. The borrower agrees to this upon signing the deed of trust and forfeits his right to a foreclosure hearing. Such a hearing is required in the case of foreclosure on a mortgage. Each state maintains its own laws on the length time required before a trustee may retake possession of a property in default.
Power of Sale
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The mechanism by which a home with a deed of trust is sold at auction is known as power of sale. This is done without a court hearing and the borrower has little right to protest or otherwise stop the sale of the home. The trustee, possessing the property title, is required to obey certain laws regarding foreclosure auctions relating to advertising and informing the defaulted homeowner of the date of sale. The homeowner may attempt to sue the trustee to stop the foreclosure if he feels the trustee has acted illegally and is attempting to foreclose on the property without proper cause.
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