A deed of trust is unlike most other deeds which are used to transfer property. Instead, this document is a version of a mortgage note which is held by a trustee until the loan is satisfied. Most often the trustee is the title company.
When a deed of trust is used the property becomes collateral which can be repossessed if the borrower defaults on their note. The deed transfers the property title to the Trustee and assigns the bank as beneficiary. Trustees have authority to sell the property through a process known as ‘foreclosure by power of sale’.
Trustees are an independent party separate from the lender. Banks, credit unions, or private lenders are listed as a secured creditor which offers them protection should the borrower incur mortgage default.
A promissory note is attached to the deed and outlines the amount borrowed, interest rate, and terms of the loan. Promissory notes provide evidence of the debt and are held by the lender until the loan is paid in full.
Since trust deeds and promissory notes are legally binding contracts it is vital to read both document. People often find these contracts confusing due to complicated legalese. It can be helpful to obtain legal counsel and have lawyers review documents to make certain there are no mistakes.
At the very least, check documents for proper spelling of borrower, lender, and Trustor names; property address; principal balance and interest; prepayment penalties; and default clause.
One concern people have is how to protect their property encumbered by a trust deed. For most, the answer is making use of a revocable living trust. With that said, most lenders won’t fund real estate loans secured by a trust unless borrowers undergo a review, or legal opinion.
Lenders often require attorneys to provide an opinion letter and warranty stating certain provisions are met in the living trust. These documents are reviewed by bank committees and can slow down the process of loan approval and closing.
Another consideration is additional steps have to be taken any time changes are made to the loan. For instance, borrowers who refinance might be required to remove the property from the trust so the lender can record the new deed, than return the property to the trust.
All of these actions require legal and recording fees which can quickly add up. Setting up a living trust for encumbered property may or may not be the best choice. It’s best to talk with a lawyer to learn the advantages and drawbacks before entering into a loan.
Estate planning can get tricky when it comes to setting up trusts which include real estate secured by a deed of trust. At Craton, Switzer and Tokar we focus on helping clients establish a suitable estate planning portfolio to protect all assets.
Whether you want to execute a basic Will or setup a family trust, our team of professionals can help. We can be reached at 562-628-5533 weekdays between the hours of 8:30am-5pm or click here to contact us via email.