What is a Deed of Trust?
A deed of trust is like a mortgage loan. The deed of trust secures payment of the loan by pledging real property as collateral. Many people use a deed of trust to secure a loan when lending a family member money to buy a house. The borrower and the lender sign a promissory note and a separate deed of trust. In the note, the borrower promises to give up possession of the house if they stop making payments. The deed of trust also outlines this promise. In other words, the deed of trust shows that the borrower is using the house to secure the loan.
In California, almost every deed of trust has a power of sale clause. This clause says that, if the borrower defaults on the loan, the lender automatically has the right to resell the house at auction.
How Foreclosure on a Deed of Trust Works
Most foreclosures on deeds on trust in California are nonjudicial foreclosures. In the nonjudicial foreclosure process, the lender first files a Notice of Default with the county recorder. The Notice of Default includes the following information:
- The amount of money the borrower is late paying
- The date by which the borrower must pay the overdue amount
To foreclose on a deed of trust, the lender must send the Notice of Default to the borrower by certified mail. If the borrower does not pay the requested amount within 90 days of the date of the notice, the foreclosure process continues. The Trustee sets a sale date and the next step is an open auction. In practice, it is usually the lender who repurchases it. Once you foreclose on a deed of trust, the lender can start the process to evict the borrower.
Understanding the Parties in the Foreclosure Process
Before you foreclose on a deed of trust you need to understand who the parties are to the process. A Deed of Trust has three parties – the Beneficiary (the lender who made the loan), the Trustor (the person or persons who borrowed the money), and the Trustee (this is typically a title company who makes sure that the loan is paid back.) When a borrower defaults on their loan, it is the Trustee’s responsibility to organize the sale of the property and recover as much of the loan as possible. This process is called “foreclosure”. In foreclosure, after the property sells at a foreclosure sale, the Trustee will pay off the Lender(s). The Trustor (borrower) will receive all leftover funds.
Part 1 of the Foreclosure Process
As mentioned above, the first phase to foreclosure on a deed of trust starts with the filing of a Notice of Default. For the first ninety days after recording the Notice of Default, the Trustor can cure the default by paying all delinquent payments and the foreclosure fees. After this 90 day period, and once the Trustee records the Notice of Sale, the right to cure the loan is no longer an option.
During the initial ninety days of foreclosure of a deed of trust, the Trustor can either pay back the loan entirely or renegotiate with the Beneficiary. This will stop the entire foreclosure process. After ninety days, however, the right to force the sale to stop is limited.
Part 2 of the Foreclosure Process
After this initial 90 days, the next step to foreclose on a deed of trust is filing the Notice of Trustee’s Sale. This document notifies the public of the sale and must continue for at minimum 21 days. The notice of sale will include a scheduled sale date for the property. The Trustee will conduct the sale and creditor(s) may bid all or part of their existing loan or loans to buy the property. In most instances, the lender who is foreclosing bids their loan balance, and the property revers back to the foreclosing lender.
It is important to note that the foreclosure process has the potential to wipe away loans that are junior to the foreclosing lender. This is because the Trustee will pay the “senior” liens before “junior” liens (those with lower priority). For example, if the first mortgage lender forecloses, junior lienholders will receive any surplus funds from the foreclosure sale after payment of the foreclosing lender’s debt. If there are no surplus funds or an overbid, the junior lienholders will receive nothing.
Start Foreclosure on a Deed of Trust
The process to foreclose on a deed of trust is very technical. If the property sells through foreclosure and the borrower believes the Trustee did not strictly follow the proper procedures, the borrower may challenge the sale.
If you need to foreclose on a deed of trust, locate your recorded document. There is usually a designated title company names as the Trustee for the loan. Contact the title company, and they will be able to help file the required foreclosure documents.
If you are loaning a friend, family member or third party money and want to secure it on real property, the documents must be correctly prepared and recorded. Contact A People’s Choice for help preparing the necessary promissory note and deed of trust. You can contact us through our website or by calling 800-747-2780.
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