Trust Deed comes into use at the time of real estate transactions. Basically, it is an arrangement or an agreement between the borrower and the lender. Under this arrangement, the property that the borrower buys with lenders’ money is kept with a neutral third party, who acts as a trustee.
This trustee will hold the property until the borrower returns the loan amount to the lender. The trustee also holds the legal title of the asset. Borrower, on the other hand, retains the actual or equitable title. They (borrower) also have the full responsibility of the asset unless the Trust Deed or Deed of Trust says otherwise.
Contents of Trust Deed
It includes the following mentions:
- Amount lend to the borrower.
- Details of the property.
- Name of the parties – borrower, lender, and the trustee.
- Date of the agreement and the maturity date.
- Requirements of the deed.
- Legal provisions to follow in case of default.
- Late fees, if any.
- Clauses for acceleration and alienation.
- Any other details that the borrower, lender, and the trustee may want.
Role of Trustee
Without a trustee, there could be no such deed. A major requirement for being a trustee is that they should be impartial. A trustee needs to be impartial because there may come a time when they need to sell the property to pay the lender in case the borrower defaults. Thus, if a trustee is not fair, they may try to affect the price to benefit either the lender or the borrower.
A point to note is that the foreclosure sale under a Deed of Trust does not require any judicial supervision in most states in the US. This means a trustee has the authority to sell the asset without needing any approval from the court. A trustee can go ahead with the sale 90 days after the Notice of Default. Also, the trustee needs to give a 21-days notice in a major circulating newspaper before selling the property.
The borrower can get hold of the property by paying the loan amount and the trustee’s fees up to three months after the recordation of the Notice of Default. If the borrower is unable to pay, the trustee can sell the property through a trustee’s sale. In case the trustee is unable to sell the property, the property goes to the lender. The borrower has no right of redemption once the trustee sells the property.
After selling the property, it is the duty of the trustee to pay back the lender. If, after paying the lender, the trustee is left with any excess amount, then that must go to the borrower.
Before accepting to be a trustee, one should make sure that it includes an indemnity for the trustee. If there is no such clause, then the trustee should request adding it before accepting to be the trustee.
Trust Deed vs. Mortgage Deed
The objective of both the Deed of Trust and Mortgage Deed is to ensure that borrower pays the lender. Both secure repayment to the lender by creating a lien on the asset or the property. Also, both the arrangement includes a provision to sell the property if the borrower is unable to pay the loan amount. Despite such similarities, both are very different from each other. Following are the differences between the two:
- There are only two parties in a mortgage – borrower and the lender. On the other hand, there are three parties – borrower, lender, and trustee – in a Deed of Trust.
- In the case of mortgages, there are more legal requirements at the time of the sale of the property, such as judicial foreclosure through the court. However, a Deed of Trust does not include any judicial provisions unless otherwise stated.
- In a mortgage, all parties involved with the transaction have an interest in the outcome. However, the trustee has to be impartial in a Deed of Trust.
- The mortgage is a time-consuming and expensive process as there is a need for judicial foreclosure (under the supervision of the court) when the lender files a lawsuit against the borrower for the non-payment of dues. On the other hand, Trust Deed bypasses the court system and sticks to the terms of the deed.
Relation with Promissory Note
It is the Deed of Trust that secures the promissory note. A promissory note usually includes information such as amount, interest rate, due date, and other things. It is held by the lender until the borrower pays the amount in full. Generally, a promissory note is not recorded with the county recorder, while a deed of trust is officially recorded.
Trust Deed now has lost its relevance even though its objective is the same as the land security agreement. Still, several US states prefer using a deed of trust over a mortgage deed.