In California, loans can be secured by real property through a deed of trust. Accordingly, a deed of trust is a security instrument that functions like a mortgage. For the most part, people refer to a home loan as a “mortgage.” Technically, however, a mortgage is not actually a loan but rather a document given to a lender that creates a voluntary lien on real property. Certain states use mortgages, while other states use deeds of trust. California uses a deed of trust instrument to secure loans on real property.
One of the key differences between a mortgage and a deed of trust involves the procedure for enforcing the lien through a foreclosure process. States that have mortgages as the security instrument usually go through a judicial foreclosure process. This means that in order for the lender to foreclose on the property, they must file a court proceeding through the state court system. On the other hand, a nonjudicial foreclosure process is typically used in states that use deeds of trust. If the deed of trust has a power of sale clause, the lender can foreclose on the real property without having to go to court. Read on to learn more about securing a loan with a deed of trust.
What is a Deed of Trust?
A deed of trust pledges real property to secure repayment of a loan. A deed of trust involves three parties:
- The trustor (borrower)
- The beneficiary (the lender)
- The trustee (an independent third-party the holds “bare” or “legal” title to the property.
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With a deed of trust, the borrower promises the lender to repay the loan. The loan is secured on real property which the borrower has pledged as security (collateral) for the loan. The true “title” to the property is held by a neutral third-party, the trustee, until the loan is paid off. The trustee is an entity (example – title company) that holds the “Power of Sale” in the event of default. Securing a loan with a deed of trust allows the trustee to sell the property and pay off the lender. A foreclosure by power of sale is neither supervised nor confirmed by the court. The property title is reconveyed to the borrower once the loan is repaid.
The deed of trust identifies the following:
- Original loan amount
- The legal description of the property being used as security for the mortgage
- The parties
- Date loan was made
- The date loan is due (maturity date)
- Legal description of the property being used to secure the loan
- Provisions and requirements for the deed of trust
- Legal procedures
- Acceleration and alienation clause
- Special notice requirements
- Assignment of rent provisions
Once executed, the deed of trust is recorded with the county recorder to show that a loan is secured on the real property. Contact A People’s Choice for more information about drafting a deed of trust to secure a real property loan.
What is a Promissory Note?
A promissory note is required to be signed by the borrower in addition to the deed of trust to secure a loan on real property. As mentioned above, the deed of trust is the security instrument. Accordingly, it binds the property to the lender in case the borrower defaults on the loan. In contrast, the promissory note is the contract between the borrower and the lender. In essence, it reflects the borrower’s consent to payback the lender the full value of the security note.
The promissory note identifies the terms of the loan such as the interest rate and payment obligations. The borrower is provided with a copy of the promissory note. The lender keeps the original document. Once the borrower pays the loan, the promissory note is marked “Paid in Full.” The note is returned to the borrower along with a recorded reconveyance deed.
Generic deed of trust forms found online may not be suited for your particular needs. Although you don’t need to hire an attorney to prepare a promissory note and deed of trust, professional help is recommended. Using the services of A People’s Choice is a great option for low-cost, professional help to make sure your documentation is properly prepared. You don’t want to find out later that your documents are flawed and your loan security compromised! Contact A People’s Choice for more information about preparing the necessary documents to secure a loan with a deed of trust. A deed of trust should be properly planned, drafted and executed. Contact us today for more information about our real estate title services.