Thursday, May 23, 2013

What a Trust Deed Is and Why You Should Care

When you obtain a loan to buy a home, you'll likely sign a Promissory Note and Deed of Trust. Parenthetically, this particular loan instrument is commonly called a mortgage; technically, it's not. A true mortgage differs significantly from a note and trust deed and is used in some parts of the country to purchase real property. See this link to learn the difference.

But let's not quibble and get off topic. A lot more people use a note and trust deed, also called a deed of trust, to buy a house. The promissory note part is pretty straightforward: It's a promise to pay a certain amount over a certain term at a certain interest rate.

The trust deed attached to the promissory note is an agreement between the person borrowing the money and the lender to transfer the borrower's interest in the property to a third party, called the Trustee. The effect of this transfer is to secure payment of the loan with the property. You, the borrower, will have what's called equitable title.

In effect, you have two agreements with your lender. The note is the promise to pay. With the trust deed you agree to secure payment by giving the trustee an interest in your property. More on this below--it's kind of important.

But the trust deed agreement also has other elements describing how the note is paid. An example is an Acceleration Clause, where the entire note becomes immediately due under certain circumstances. These could be sale of the home, default on payment of the note or refinancing the home.

Why sale of the home? Because sometimes, people attempt to sell the home and allow the new buyer to take over payments. Lenders don't like that.

But trust deeds could also have an Assumption Clause. Most don't. However, FHA loans are assumable if the new buyer is qualified. This is important, because you may want to sell your home in a few years when prevailing interest rates are likely to be higher than now. If your home has an assumable 4% FHA loan, it might be attractive to a prospective buyer if market interest rates are 7%.

Interest rate adjustment clauses are also not uncommon in trust deeds. The
point here: Read the trust deed provisions. They could very well have stuff neither your lender, real estate broker, mortgage broker or anyone else told you about. Get legal advice if anything isn't clear. Don't forget--some lawyer prepared the thing!

Here's the "more on this below" part: The trust deed is what makes foreclosure work. You don't pay, the lender notifies the trustee, and the trustee, who has an interest in the property, begins the foreclosure process to take back the property and give it to the lender. No judge is necessary, which is why it's called a Non-judicial foreclosure.

Your lender, however can bypass the process and sue to collect under the Promissory Note. In this scenario--a Judicial Foreclosure--the lender goes to court and asks the judge to enforce the note payment. Judicial foreclosures are more expensive and take a long time. Moreover, some states have a Right of Redemption, which can cloud the title for the redemption period.

Again, read the provisions of the Deed of Trust, and seek professional advice if anything is unclear.