Purchasing a new home or piece of land is always an exciting event. Once you’ve found the right property and made an offer that the sellers accept, the next step is to secure financing by using a Mortgage Agreement or Deed of Trust.
In most states, people can use either document to take out a loan, but there are certain states that may require one instead of the other. The biggest distinction between a Deed of Trust and a Mortgage Agreement is that a Deed of Trust involves another individual in the agreement, called a trustee, in addition to a borrower and a lender.
In this post, we’ll explain the role of a trustee in a Deed of Trust so you can understand the roles of each party involved with securing your finances.
What is the role of a trustee in a Deed of Trust?
There are three parties in a Deed of Trust:
- The borrower
- The lender
- The trustee
The borrower is the person purchasing the home and who requires the loan. The lender is the person or legal entity providing the loan to the borrower.
The trustee is a neutral third-party who holds the legal title to a property until the borrower pays off the loan in full. They’re called a trustee because they hold the property in trust for the lender.
The trustee is also held partly responsible for the loan repayment if the borrower defaults (fails to repay the loan). In this case, the trustee would likely sell the property in order to repay the loan.
Once a loan has been repaid, the trustee is responsible for transferring the legal title of the property to the borrower. To do this, the trustee must file a Deed of Reconveyance (a document stating the debt was paid) with the local county recorder or deeds registry. A penalty may be issued if this isn’t done within a reasonable time limit, usually within 30 days of the final payment, and the debt will still be registered against the property.
Who can be a trustee in a Deed of Trust?
Some states have legislation describing the necessary qualifications for a trustee, so be sure to check your local laws before appointing a trustee in your Deed of Trust. Otherwise, there may be no restrictions on who can act as a trustee.
Typically, a trustee is an unbiased individual or legal entity like a lawyer or a bank. It’s generally accepted for a trustee to be one of the following:
- An attorney
- A domestic corporation or LLC (limited liability corporation)
- A professional corporation or LLC
- A title insurance company or agent
- Any agency or instrumentality of the US government
- Any national bank, savings bank, or savings and loan association
Often, a borrower and lender will jointly appoint a trustee but in some situations the lender will reserve the right to appoint the trustee. In either case, it’s imperative the trustee remains unbiased and doesn’t act in a way that would unfairly benefit the lender or the borrower.
Why might a Deed of Trust be used instead of a Mortgage Agreement?
There is a power of sale clause in a Deed of Trust that allows the lender to foreclose (seize and sell) the property in the case of a default. If this happens, the trustee can sell the property without needing a court order. This is called a non-judicial foreclosure and is one of the reasons a Deed of Trust is used more often than a Mortgage Agreement in the United States.
If a borrower defaults in a Mortgage Agreement, a judicial foreclosure will ensue. In this case, the lender must get a judge to issue a court order that allows a sale to proceed. Generally, an auction is held in which people can bid on the house and, if someone meets or exceeds the asking price, they become the owner.
The lender’s debt is paid using these proceeds and the borrower receives the remaining amount. If the asking price is not met, the lender becomes the owner and the borrower is paid for any equity they own in the home.
Consequently, the foreclosure process takes much less time with a trustee and is why many lenders favour a Deed of Trust over a Mortgage Agreement.
Securing your finances with a Deed of Trust
A Deed of Trust is a way of securing a home loan with a third party’s involvement—the trustee. Rather than having the borrower and lender interact directly with each other, the trustee is there to perform three main duties:
- Hold the property in trust for the lender
- Be partly responsible for the loan repayment
- Transfer the legal title of the property once the loan is repaid
If you choose to secure your home financing with a Deed of Trust, an appointed trustee should be there to protect both the lender’s and the borrower’s rights.