Explanation of a Promissory Note Secured by a Deed of Trust

Save

Most mortgage loans comprise of a promissory note secured by a deed of trust. The two documents are independently drafted and signed, but they cooperatively work together to create a single mortgage loan. One document requires you to pay money back over time, while the other gives the lender a security interest in your home.

Promissory Note

  • A promissory note is a legal loan document that outlines how and when a borrower will repay money to a lender. The promissory note contains the borrower's pledge to repay the money borrowed. The note also identifies the repayment term, the interest rate and the payment schedule. A promissory note creates a personal obligation of the borrower to repay the money that was borrowed to the lender. A promissory note, by itself, has no relationship to any real estate or other property.

Deed of Trust

  • A deed of trust is a security document that works together with the promissory note. The deed of trust grants the lender a lien in the borrower's real property, such as the borrower's home. The deed of trust thus creates the relationship between the mortgage loan and the home. The deed of trust provides that if the borrower defaults in its repayment obligations under the promissory note, the lender may take the borrower's home through the process of foreclosure.

Mortgage Substitute

  • A deed of trust is a mortgage substitute. In the early 20th century, most mortgage lenders used traditional mortgage documents, but toward the end of the 20th century and the beginning of the 21st century, most mortgage lenders shifted to the deed of trust. A deed of trust and mortgage have the same legal effect, which is to create a mortgage lien in favor of the lender, but a deed of trust generally is more favorable to the lender.

Power of Sale Foreclosure

  • The reason a deed of trust generally is more favorable for lenders then typical mortgage documents is that a lender, under a deed of trust, can foreclose without ever going to court. Deeds of trust provide lenders with the option for power of sale, or nonjudicial, foreclosure. Under this foreclosure strategy, a lender can hire an independent third-party, commonly called a trustee, to hold a foreclosure sale of the property. The lender is not required to file a lawsuit in power of sale foreclosure. Power of sale foreclosure is not available under a traditional mortgage document.

References

Promoted By Zergnet

Comments

You May Also Like

Related Searches

M
Is DIY in your DNA? Become part of our maker community.
Submit Your Work!