YOU ASK:

What is a deed of trust?

WE ANSWER:

In simple terms, the deed of trust (or a trust deed) is a mortgage with a streamlined process of foreclosure.

Compared to a mortgage where there are two parties involved: the lender and the borrower, the deed of trust has an additional party - the trustee.

The trustee, or the holder of the deed of trust, is a neutral person or company that temporarily holds the title until the borrower can fully pay off the loan.

Once the trust is signed, it is documented in the land records. The copy of the original deed of trust is kept by the lender. The borrower will also sign a promissory note, allowing the lender and the third to dispose of the house in an attempt to recover the unpaid loan amount. When the loan is fully paid off, the lender will return the deed of trust and the promissory note to the borrower.

As long as the borrower pays the monthly payments regularly, there should not be a problem. However, when the borrower fails to pay the amortizations, the lender can quickly move to foreclose the property.

What simplifies a deed of trust as compared to a mortgage is that the lender just has to supply proof that the borrower has been delinquent in his payments of the loan. Then the trustee can start the steps towards the foreclosure of the house that is listed in the deed of trust. This foreclosure is called a third party action.

As a prospective home buyer, it is important that you understand the details of a deed of trust, before you start signing one. You should know all the conditions and the ramifications that are listed in the deed of trust.

Check that the deed of trust you are about to sign includes:

  • The amount of the original loan
  • The parties involved - the name of the lender, borrower and trustee
  • The Loan's Inception and Maturity Dates
  • The property's legal description
  • Conditions, provisions and requirements of the loan
  • Definition of late fees and penalties
  • Legal procedures that will be undertaken
  • Alienation and Acceleration clauses
  • Prepayment penalties, where applicable
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