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What is a deed of trust?

In some states, a deed of trust — also called a trust deed — is used in place of a mortgage. A deed of trust accomplishes the same goal as the mortgage, but it is structured differently. The deed of trust is a three-party document. The borrower is called the trustor and the lender is called the beneficiary. The deed of trust is not made directly to the beneficiary, but is instead given to a third party called a trustee. The trustee acts in only two situations.

1. If the deed of trust is satisfied and the loan paid off, the trustee issues a reconveyance to the trustor, releasing the lien.

2. If the terms of the agreement are not met (default), the trustee acts for the beneficiary to sell the property. Chapter 20 discusses this situation in more detail and explains how to avoid defaulting on your loan.

From the Expert

A reconveyance is a legal term for returning something, such as the deed for your home to you.

The term mortgage will be used for both mortgages and deeds of trust in this book.

Deed of Trust States

Alaska

Nevada

Arizona

North Carolina

California

Virginia

Mississippi

Washington, DC

Missouri

Mortgage States

Alabama

Minnesota

Arkansas

New Hampshire

Connecticut

New Jersey

Delaware

New Mexico

Florida

New York

Hawaii

North Dakota

Indiana

Ohio

Kansas

Oregon

Kentucky

Pennsylvania

Louisiana

Rhode Island

Maine

South Carolina

Massachusetts

Vermont

Michigan

Wisconsin

States That Use Both Deeds of Trust and Mortgages

Colorado

Oregon

Idaho

Tennessee

Illinois

Texas

Iowa

Utah

Maryland

Washington

Montana

West Virginia

Nebraska

Wyoming

Oklahoma

Note: Georgia uses a document called a security deed.

What is a promissory note?

When you sign all the documents that go along with giving a mortgage, you will sign what is called a promissory note (also referred to simply as a note). This is the document that sets out the terms of the loan, and as the name implies, is your promise to repay the money. The mortgage is the document that puts up your real estate to secure repayment. In other words, the promissory note describes how much you are borrowing and the terms of the loan, while the mortgage is what gives the bank the right to take your home if you do not live up to what you agree to do in the promissory note. It is common for the mortgage to restate all the terms of the note, making the documents sometimes look very similar. However, they have very distinct purposes.

The reason the note is so important is because it is a negotiable instrument. Negotiable instruments are what make the system work. A buyer of a negotiable instrument, as long as the procedure is done properly, becomes a holder in due course. The point behind a holder in due course is that once the loan has been sold, you may be stuck with it — even if you did not fully understand the terms or there were irregularities because of a dishonest original lender. Later, a worksheet is provided that will help you find the best loan for your situation. (see p. 216.)

Negotiable instruments are treated differently from other contractual promises. They must be in a certain form (they are sometimes called form or formal contracts .) When in the proper form, they create rights for those to whom they are transferred (those who buy them) that other contracts do not.

The transferee of a promissory note secured by a mortgage who takes it in good faith and for value (buys it) becomes a holder in due course (HDC). An HDC has special defenses that a transferee of other contracts does not have. For example, if the mortgage broker lied to you about the terms of the loan (fraud), you could sue the broker but not the HDC, the person who bought the loan, if the loan was sold. The HDC would be protected against this type of fraud so long as the HDC was not aware of it at the time of purchase (bought in good faith).

Because of this and other protections, secondary lenders can buy mortgages without investigating each one to make sure everything is above board. Such an investigation would create such a time and expense problem that the secondary market could not function. The secondary mortgage market is explained in Chapter 2.

If you believe you were taken advantage of by a lender, tell your story and show your documents to an attorney. All the rules covering a negotiable instrument and a holder in due course are well beyond the scope of this book. There are irregularities against which an HDC is not protected, and an attorney can tell you if you have a case.

From the Expert

Never sign a note or mortgage unless you understand all the terms.

 
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