Utah Real Estate Code 57-1-19: Trust Deeds–Definitions of Terms
• “Beneficiary” means the person named or otherwise designated in a trust deed as the person for whose benefit a trust deed is given, or his successor in interest.
• “Trustor” means the person conveying real property by a trust deed as security for the performance of an obligation.
• “Trust deed” means a deed executed in conformity with (3) Sections 57-1-20 through 57-1-36 and conveying real property to a trustee in trust to secure the performance of an obligation of the trustor or other person named in the deed to a beneficiary.
• “Trustee” means a person to whom title to real property is conveyed by trust deed, or his successor in interest.
• “Real property” has the same meaning as set forth in (5) Section 57-1-1.
• “Trust property” means the real property conveyed by the trust deed.
A Deed of Trust is essentially an agreement between a lender and a borrower to give the property to a neutral third party who will serve as a trustee. The trustee holds the property until the borrower pays off the debt. During the period of repayment, the borrower keeps the actual or equitable title to the property and maintains full responsibility for the premises, unless expressly stated otherwise in the Deed of Trust. The trustee, however, holds the legal title to the property. Deeds of Trust are not as common as they once were. Although they serve the same purpose as a land security agreement, these agreements are not the same as mortgages. In a traditional mortgage, everyone involved has an interest in the outcome. A Deed of Trust, by contrast, involves an impartial trustee. The trustee must be impartial in this arrangement because he must be prepared to sell the property to satisfy the debt if the borrower defaults. All states require that the trustee remains neutral to ensure that the trustee does not try to alter the price to benefit either the borrower or the lender. A foreclosure sale under a Deed of Trust does not have to follow the same procedures as a judicial foreclosure, which requires stricter parameters and a higher level of accountability; no judicial supervision is required for a foreclosure sale under a Deed of Trust in most states. Once the sale is complete, the trustee will distribute the proceeds between the borrower and the lender. The lender gets whatever funds are required to satisfy the debt, and the borrower receives anything in excess of that amount. This setup allows the lender to purchase the property, closing out the debt and satisfying all of the requirements of the deed. This is another detail that separates the Deed of Trust from a typical mortgage, since typical mortgages have specific legal requirements in addition to the sales.
How Is a Deed of Trust Different from a Mortgage or a Promissory Note?
In some states, a deed of trust is used instead of a mortgage. A mortgage agreement creates a lien against the real property, protecting the lender from a situation where the borrower defaults on their obligations. While both a deed of trust and a mortgage provide a security interest for the lender in the property, the lender does not hold the security interest as is the case in a traditional mortgage. A mortgage agreement is between two parties: the borrower and the lender. With a deed of trust, a third-party trustee holds the equitable title to the real property secured by the deed. Deeds of trust are used in conjunction with promissory notes. The deed of trust is the security for the amount loaned to finance the real estate purchase, and is secured by the underlying piece of real estate. The deed of trust is what secures the promissory note. The promissory note includes the interest rate, the payment amounts and terms, and the buyer’s promise to pay the lender the amount borrowed plus interest. The promissory note is held by the lender until the loan is paid in full, and generally is not recorded with the county recorder or registrar of titles (sometimes also referred to as the county clerk, register of deeds, or land registry) whereas a deed of trust is recorded.
Parties to a Deed of Trust
There are three parties to a deed of trust, as opposed to a traditional real estate mortgage in which the parties are simply the borrower and the lender. A deed of trust includes the following parties:
• Trustor – This is the borrower (the person purchasing the home or other piece of real estate).
• Lender – This is the person or entity putting up the funds for the purchase.
• Trustee – This is an independent third party that holds legal title to the real estate. The trustee is independent because they do not represent either the seller or the buyer in a real estate transaction. The trustee is usually a separate legal entity like a title company.
In some cases, there is a fourth party to a deed of trust, known as a guarantor. This is someone else who signs along with the trustor, providing another avenue for the lender to be repaid in the event the borrower defaults on their obligations.
Trustee’s Rights under a Deed of Trust
The trustee retains the right to sell the property if the trustor (borrower) defaults on their obligations under the agreement. If the terms of the loan are met and the buyer meets their obligation, then the trustee transfers/reconveys ownership of the property to the buyer who will then hold equitable title to their property.
When Should a Deed of Trust Be Used?
Some states are “mortgage states” that do not use deeds of trust. In other states, state law requires the use of a deed of trust whenever the buyer is borrowing some or all of the money needed to finance their purchase of real estate. In approximately 15 states, either a mortgage or a deed of trust may be used to secure the lender’s interest in a real property transaction. From the lender’s standpoint, using a deed of trust may be preferable because doing so allows them to legally sidestep what can be a time-consuming and expensive judicial foreclosure process, if the borrower defaults on their loan payments.
What Is a Trustee?
A deed of trust includes an independent third party—the trustee—who doesn’t represent either the borrower or the lender. The trustee is typically an entity such as a title company that holds “power of sale” in the event that the borrower defaults. Once the deed is paid in full, the trustee reconveys the property to the buyer. The trustee can file a notice of default in the event that the borrower doesn’t pay according to the promissory notes terms, but the trustee will often substitute another trustee to handle the foreclosure itself. This is accomplished by filing a formal Substitution of Trustee in most cases. The trustee has the power to sell the property on the courthouse steps in the event of default, without a court procedure. This is called non-judicial foreclosure, and it’s a key difference between a deed of trust and a mortgage, in which a bank must go through the court to initiate a foreclosure. Laws vary by state, but the trustee cannot complete the foreclosure until after a certain amount of time has passed since the notice of default was filed. Some states also allow a redemption period, in which the borrower has time to buy back the property after a non-judicial foreclosure.
What Is a Promissory Note?
The deed of trust documents the terms of the debt, secured by the property. Although it often goes hand-in-hand with a deed of trust, the promissory note is a separate document. Essentially, a promissory note is s a promise to pay, signed by the borrower in favor of the lender. It contains the terms of the loan, such as the interest rate and payment obligations. The promissory note is generally not recorded publicly. The promissory note is marked “paid in full” when the loan is paid off and it’s returned to the borrower along with a recorded reconveyance deed. The lender retains the promissory note during the term of the loan. The borrower has only a copy until the loan is paid off.
Before Signing a Promissory Note and Deed of Trust
Read both documents, including the preprinted portions, before you sign a promissory note and a deed of trust. Preparers are human and can make mistakes, so it’s important to review certain items:
• The spelling of trustors’ names
• The principal balance of the loan
• The interest rate
• The rider if the interest rate is adjustable
• The payment amount
• Prepayment penalties, if any
• The address of the property
Steps To Take When Making a Declaration of Trust
A trust deed changes who benefits from the property, in other words, who the true owners are. You should register it at the Land Registry (so that it is recorded on the public record). The change of ownership can be enforced in a court. The first consideration is therefore whether making a declaration of trust is in the interests of all parties. Responsibility for the upkeep of the property and any mortgage repayments will change proportionally as well. The next matter to consider is what proportion each owner will own. The total cost of the property is likely to include the purchase transaction fees, stamp duty, mortgage interest and perhaps obvious repairs or renovations. Your deal with the other owners might be that you pay some of these disproportionately to your share. The proportions that you set out in the trust deed are those in which any sale proceeds will be distributed. If the property is sold for less than total costs, someone financing the deposit might not get back that entire he or she put in. You can put other matters in the trust document, such as how repairs to the property will be paid for. However, because your deed is likely to be registered and available for public inspection, you might not want to keep those types of arrangements private. You can record them in another agreement between yourselves. The deed of trust must be created by the registered owners and with the knowledge and approval of all the true owners. If the consent of the registered owner has not been given, the deed could be void, and registration of it could be fraudulent. You can make a declaration of trust at any time. Usually, one is made on the completion date of the property purchase so that the true owners never risk that their interest in the property cannot be claimed by them.
Alternatives to Using a Deed of Trust
You don’t have to make a deed. Alternatively, if there are four or fewer beneficial owners then you could use an agreement under hand (a normal agreement that does not have to be witnessed) called tenants in common agreement. As far as ownership is concerned, this has the same effect as a declaration of trust. The difference is that a trust is not made.
Difference between a Deed and a Deed of Trust
With a deed, you transfer the ownership of the property to one party. When a property is bought, the deed is drawn up and signed by both the seller and the buyer, and, if the conditions of the contract are all met, the seller transfers the title and all the attached rights in the name of the buyer. The deed contains a legal description of the property, as well as the name of the previous owner and the conditions as to how he will transfer the property to the buyer. The deed should then be notarized and recorded in the county records section. There, the abstract of title is updated to add the new owner.
In contrast, a deed of trust does not mean the holder owns the property. In an arrangement involving a deed of trust, the borrower signs a contract with the lender with details regarding the loan. The holder of the deed of trust is an accredited third party, and holds the property until all the conditions of the contract are met. That is, until the loan is fully paid. When the loan is paid, the deed of trust is released and the borrower gets the full ownership of the property. However, in the event that the borrower is unable to keep up with the payments of the loan, the holder of the deed of trust has the right to foreclose and sell the property. What happens is that the lender presents proof that the borrower has been delinquent in his payments. The deed of trust simplifies the foreclosure process in that the lender does not have to go through a court proceeding to start the foreclosure. What happens is that the holder of the deed of trust sells the property in behalf of the lender.
Some of the key elements of the deed of trust include:
• The names of the borrower and the lender
• The amount being borrowed
• When the loan is started
• Interest rates
• The loan maturity date
• Penalties and late fees
Terms Used In Utah Code 57-1-19
• Beneficiary: A person who is entitled to receive the benefits or proceeds of a will, trust, insurance policy, retirement plan, annuity, or other contract.
• Deed: The legal instrument used to transfer title in real property from one person to another.
• Obligation: An order placed, contract awarded, service received, or similar transaction during a given period that will require payments during the same or a future period.
• Property: includes both real and personal property.
• Trustee: A person or institution holding and administering property in trust.
• Trustor: The person who makes or creates a trust. Also known as the grantor or settlor.
Real Estate Attorney
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