Mortgage Flashcards
(6 cards)
Dee of Trust
A deed of trust is a legal document used in some states (including Texas, your current location) as a security instrument for a loan, most commonly a home loan. It’s similar to a mortgage but involves a third party. Here’s a breakdown of its key aspects:
Core Function:
A deed of trust secures a loan by transferring legal title of a property to a neutral third party (the trustee) who holds it until the borrower (the trustor or grantor) repays the loan to the lender (the beneficiary).
While the legal title is held by the trustee, the borrower retains equitable title, meaning they have the right to possess and use the property as long as they meet the loan obligations.
Parties Involved:
There are three main parties to a deed of trust:
Trustor (Borrower/Grantor): The individual or entity that borrows the money and pledges the property as security for the loan. They sign the deed of trust, promising to repay the debt according to the terms of the associated promissory note.
Beneficiary (Lender): The person or entity that lends the money. They are the recipient of the payments made by the borrower and have a beneficial interest in the property.
Trustee: A neutral third party who holds the legal title to the property. The trustee’s primary role is to manage the property according to the terms of the deed of trust. In the event of default by the borrower, the trustee has the power to initiate foreclosure proceedings on behalf of the lender. Often, the trustee is a title company or an escrow company.
How it Works:
Loan and Promissory Note: The lender provides funds to the borrower to purchase the property. The borrower signs a promissory note, which is a written promise to repay the loan with specific terms (interest rate, payment schedule, etc.).
Deed of Trust Creation: To secure the promissory note, the borrower signs a deed of trust, which transfers legal title of the property to the trustee. This deed references the promissory note and outlines the conditions under which the trustee will hold the title.
Repayment: As the borrower makes payments on the loan, they retain equitable title and possession of the property.
Loan Payoff: Once the loan is fully repaid, the beneficiary (lender) instructs the trustee to execute a deed of reconveyance. This document transfers the legal title back to the borrower, officially removing the lien on the property.
Default: If the borrower fails to make payments or violates the terms of the promissory note and deed of trust, the lender can instruct the trustee to initiate foreclosure proceedings. Because a deed of trust typically contains a power of sale clause, the trustee can usually conduct a non-judicial foreclosure, meaning they can sell the property without going through a lengthy and costly court process.
Key Differences from a Mortgage:
Number of Parties: A mortgage typically involves only two parties: the borrower (mortgagor) and the lender (mortgagee). A deed of trust adds the trustee as a third party.
Title: In a mortgage, the borrower holds the legal title, and the lender has a lien on the property. In a deed of trust, the trustee holds the legal title until the loan is repaid.
Foreclosure Process: Deeds of trust often allow for a faster and less expensive non-judicial foreclosure process due to the power of sale clause granted to the trustee. Mortgages typically require a judicial foreclosure, which involves court proceedings.
In summary, a deed of trust is a three-party agreement used to secure a real estate loan, where legal title is held by a neutral trustee until the loan is repaid, offering lenders a potentially more streamlined foreclosure process in case of default.
Who has priority deed of trust
In a deed of trust, the priority of liens is generally determined by the “first in time, first in right” rule. This means the lien that is recorded earliest in the county records typically has the highest priority.
Therefore:
Senior Liens (those recorded earlier) have priority over Junior Liens (those recorded later).
Here’s how this works in practice during a foreclosure:
The proceeds from a foreclosure sale are used to pay off the liens in order of their priority.
The senior lienholder is paid first, in full, before any funds are distributed to junior lienholders.
If there are remaining funds after the senior lien is satisfied, the junior lienholders are paid in the order of their recording.
It’s possible that junior lienholders may not receive the full amount they are owed, or even anything at all, if the sale proceeds are insufficient to cover the senior liens.
Important Considerations:
Recording is Crucial: Recording the deed of trust (or other lien documents) in the county records establishes the lien’s priority. An unrecorded lien may be subordinate to later recorded liens, even if the unrecorded lien was created first.
Exceptions: There are some exceptions to the “first in time” rule. For example, in Texas and many other states:
Property tax liens often have “super priority” and can take precedence over even previously recorded mortgages and deeds of trust.
Mechanic’s liens can sometimes have priority dating back to the commencement of work, even if recorded later than a deed of trust. The specifics vary by state.
HOA/COA liens: Some states have laws giving limited priority to certain homeowner association or condominium association assessment liens.
Subordination Agreements: Lienholders can voluntarily agree to change the priority of their liens through a subordination agreement. For example, a senior lender might agree to subordinate their lien to a new, larger loan.
In summary, in a deed of trust, senior liens recorded earlier generally have priority over junior liens recorded later. However, it’s essential to be aware of potential exceptions and the importance of recording to establish and maintain lien priority
lien (lee-inn)
A lien is a legal right or claim that a creditor has in another person’s property as security for a debt or obligation.
Acts as a grantee the creditor can collect or recover if the debate is not paid.
a lien gives legal right to a creditors or a person the right to take certain actions in regarding if the debate is not paid.
Encumbrance
A lien is considered an encumbrance on the house on the property limit the owners ability to sale.
types of lien
mortgage liens
Tax liens: if you don’t pay property tax
Judgment lien
These result from judgment against the property owner.
Unresolved lien can lead to foreclosure where the creditors takes possession.
liens types created
Mortgage liens are placed on the mortgage the day they are created , it is a legal claim,.
The lender has on your property as security for the loan so the lien exists whether or not you behind in the just give a right to the enforce it if the borrow defaults on payment.
