What Is a Real Estate Deed of Trust?
A deed of trust is also known as a trust deed. The Free Dictionary website defines a deed of trust as a "document that embodies an agreement between a lender and a borrower to transfer an interest in the borrower's land to a neutral third party, a trustee, to secure the payment of a debt by the borrower." A deed of trust is similar to a mortgage but has different important consequences.
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A Three-Party Deal
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The deed of trust triad Unlike a mortgage where you hold the title and give your lender a lien on your property until it's paid off, a deed of trust involves three parties: you (the borrower or trustor), the beneficiary (or lender) and the trustee (a neutral third party), usually an insurance agency or title company that holds the bare legal title and power of sale by default.
Your deed of trust is recorded in the land records of the corresponding county that the property is in. The lender, or beneficiary, retains the original deed of trust until you pay off your home loan. As defined in the provisions written in your deed of trust, the appointed trustee may legally sell your home at auction in a power of sale foreclosure process for the beneficiary (lender) in the event that you miss your monthly payment and default on your home loan.
The Anatomy of a Deed of Trust
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The deed of trust is a structured loan contract. Your deed of trust document should detail important identifying information about your property, as well as a detailed description of the terms and conditions of your loan. Specifically, it should include the original amount of the loan, a legal description of your property, the parties involved, the maturity date of your loan, the provisions and requirements of the loan, a definition of late fees, any acceleration and alienation clauses and prepayment penalties.
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Foreclosure Power of Sale
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Deed of trust foreclosures are not supervised by a court system. In the unfortunate event that you default on your home loan, the provisions in your deed of trust empower the trustee to sell your property in what is called a "foreclosure power of sale." Unlike a defaulted mortgage where a judicial foreclosure process can be initiated, the power of sale foreclosure, unique to the deed of trust, is neither supervised nor confirmed by a court system. Because the power-of-sale foreclosure process is not regulated by a court, there is an increased chance of title disputes arising later as a result.
Repossession
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The lender may take possession of your defaulted deed of trust property. Unlike a mortgage, a deed of trust grants the lender the right to purchase your distressed deed of trust at a power-of-sale foreclosure auction, also known as a trustee sale. Judicial foreclosures do not afford the lender the right to buy your distressed property unless the mortgage has a provision for a "foreclosure by power of sale" written into the contract.
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