A Trust Deed or a Deed of Trust is the document that creates a lien on real estate to secure a Promissory Note, which is a promise to repay borrowed money. It is one of two documents you will need for a Real Estate Loan.
Note: The Texas Deed of Trust creates a lien on the borrower’s interest in real property to secure the promise to pay borrowed money. A Deed of Trust also contains many obligations of the Borrower, including the payment of property taxes, insurance, and maintenance and repairs of the property. It should be filed with the County Clerk to create a lien on the borrower’s interest in the real property.
There are three parties named in a Deed of Trust.
- The person signing the Deed of Trust is called the Grantor. This is the person that owes the borrowed money. Also called the Borrower. This Grantor is the only person to sign the document.
The Grantor must own title to the property. Only the Grantor’s interest in the property can be used as collateral for the loan.
This person is referred to as the Grantor because he or she is “Granting” a lien on the property to secure the promissory note.
If the Grantor or Borrower only owns title to a 50% interest in the property, the lien only applies to 50% of the title to the property.
The Grantor is granting permission to the Trustee to sell the property if the Grantor fails to comply with the Real Estate Loan documents.
In a Mortgage, the Grantor is called the Mortgagor. Grantor is the owner of the interest in real property used to secure the repayment of the borrowed money.
- The next person named is the Trustee. This is the person or entity that is authorized by the Grantor/Borrower to sell the property if there is a default or failure to comply with the Real Estate Loan documents.
The Trustee is usually the person that prepares the Deed of Trust. It is usually a lawyer or an employee of the Lender.
The Lender can change the Trustee at any time. However, the Grantor or Borrower cannot change the Trustee.
- The third person named in a Deed of Trust is the Grantee or Beneficiary. This person or entity is the Lender, or the person or entity to whom the money is owed.
The Trustee does nothing unless the Lender requests the Trustee to start the foreclosure process if there is a default on the loan.
A Deed of Trust should be filed with the County Clerk in the county where the property is located.
When a Deed of Trust is properly prepared, signed, and filed with the County Clerk, a lien is created on the property to secure the repayment of the borrowed money.
Note: The document must include the correct legal description of the property so that the lien is created on the correct property. This is required by the Texas Property Code.
The borrower must own legal title to the property that is being pledged to secure the borrowed money.
Good to know: If the borrower defaults on the promise to repay the borrowed money, the lender is permitted to foreclose the lien to sell the property at a public auction. The Texas Property Code sets out the Texas lien foreclosure process. The borrower’s interest in the real property is sold at a public auction and the money received at the sale is used to repay the borrowed money.
Mortgage Deed of Trust
Some people refer to a Trust Deed as a Mortgage Deed of Trust. Although a Deed of Trust is similar to a Mortgage, which is used in other states, it is not a Mortgage.
Good to know: Texas does not use mortgages. Instead, Texas uses Deeds of Trust. The document is referred to as a Deed of Trust because there is a Trustee named for the property.
Even though there is a Trustee named, the Trustee does not do anything unless there is a default or a failure to comply with the promissory note or deed of trust.
With a Deed of Trust, a Trustee is named and authorized to sell the property at a public auction if there is failure to comply with the promissory note or the deed of trust.
This is referred to as a non-judicial foreclosure sale, which means the Lender does not need to ask a court permission to foreclose its lien. The Lender merely sends a letter to the Trustee and asks the Trustee to conduct the foreclosure.
Note: The Texas Property Code prescribes the foreclosure process. Generally it requires that foreclosure sales are to be held on the first Tuesday of each month in Texas. The Trustee is required to give the Borrower 21 days prior written notice of the day of the foreclosure sale.
The Trustee is required to file and post a public Notice of Sale with the County Clerk. The Notice of Sale must contain the correct legal description of the property to be sold at public auction. Only the Borrower’s interest in the real property can be sold at the public auction. Title to the property is transferred at the public auction for cash. The cash is applied to the borrowed money and expenses of the sale.
Good to know: Mortgages or other types of loans require the Lender to go to a court and ask permission to foreclose its lien to sell the property. However, the Texas Property Code does not require the court to foreclose a Deed of Trust lien.
The Borrower may have rights to file a lawsuit to stop a foreclosure sale if the Trustee or Lender fails to comply with the Deed of Trust or the Texas Property Code.
Borrowers may also have the right to file for Federal Bankruptcy protection.
Basically, the foreclosure process in the Texas Property Code requires the Trustee to send letters to the Grantor/Borrower demanding that he or she comply with the Loan Documents. If the Borrower’s defaults are not fixed, the Trustee is authorized to sell the Borrower’s interest in the property at public auction.
Deed of Trust
If you loan someone money and want to secure the promise to repay the borrowed money with real estate, you will need a Deed of Trust.
To secure the loan, the Borrower, the person that owes you the money, signs a Deed of Trust to give you, the Lender, a lien on real estate. A correct legal description of the property is essential to make sure the Lender has a valid lien on the Borrower’s interest in the real property.
The Borrower does not need to own the property, BUT the person signing the Deed of Trust must own an interest in the property. It is legal for one person to pledge his or her interest in real property as collateral for another person’s loan.
The Deed of Trust must be in writing, signed by the property owner, and filed in the County Clerk property records.
The Deed of Trust should describe the loan amount, name a Trustee, and describe the collateral securing the loan. A correct legal description of the property is essential for a valid Deed of Trust.
Good to know: One Deed of Trust can be used to grant liens on multiple properties if required by a Lender. Sometimes one property may not have sufficient value to secure the borrowed money.
A Deed of Trust can also provide for Partial Releases if the Borrower pays the loan amount down and wants some of the property released from the lien.
Note: Once the loan is paid as agreed, the Lender must file a Release of Lien to remove the lien from the property. It is the Lender’s obligation to release the lien when the loan has been paid in full. The Release of Lien should be promptly filed with the County Clerk.
If a Borrower defaults and does not repay your loan, a Trust Deed or Deed of Trust allows you to ask the Trustee named in the Trust Deed to sell the Borrower’s interest in the property at a public auction. Proper public notices are required by the Texas Property Code.
The money the Trustee receives at the public auction is given to you, the Lender, to be applied to the borrowed money, interest, attorney’s fees and foreclosure expenses. Any excess money is to be given to the Borrower.
Seller Financed Mortgage
Good to know: If you loan someone money and want collateral for the loan, you will need a Deed of Trust. However, beware that you should not use a person’s residence as collateral. This may violate the Texas Homestead Laws which prohibits liens on homesteads in Texas.
A Deed of Trust is rarely used without a Promissory Note. A promissory note is one of the two documents needed for a Real Estate Loan.
The Promissory Note is a promise to pay money. The Promissory Note states the amount owed, the interest rate, number of payments, maturity date, payment amount and many other provisions.