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Understanding A California Deed of Trust

By Tabitha Naylor

When a person borrows money to buy a house, he or she has to sign a pledge or promissory note to pay back the mortgage loan. The promissory note takes the form of a mortgage note or a deed of trust. Individual states and jurisdictions determine whether the note will be a mortgage note or a deed of trust. It is not a matter of individual choice. In California it is most usually a deed of trust that is signed.

A California "deed of trust" is signed when a person takes out a home loan. The deed of trust outlines the specific terms of the repayment plan. Although it serves the same purpose as a mortgage note there are several key differences.

To better understand how a deed of trust differs from a mortgage note it is important to understand how lenders structure mortgage loans and how the mortgage loan functions. The mortgage loan itself is an agreement between the lenders and the borrowers. The lender holds the title to the house and the mortgage note acts as a lien or obligation that must be fully paid off before the house can be sold. When a loan is backed by a deed of trust, a third party, usually identified as the trustee, is the one who holds the title to the house. When the borrower has paid off the loan, the lender notifies the trustee that the obligation has been paid off in full and the trustee turns the title over to the borrower.

Who is the trustee? The trustee in a deed of trust loan can be a law firm, a title company, a bank, or an individual. The trustee must be neutral third party. That means the trustee must be a person, or a company that has no pre-existing personal or financial relationship with either the borrower or the lender.

According to California law, a deed of trust must identify the property in question and identify all parties to the agreement including the lender, the borrower, and the trustee. California law requires both the borrower and the lender to sign the deed of trust. There is no requirement to officially record a deed of trust in order for it to be in force, but in practice almost all deed of trusts are notarized and recorded with the county recorder. Only notarized deeds of trust can be recorded.

If the borrower fails to meet their payback obligation the deed of trust gives the power to sell the home to the trustee. This marks a significant difference from a mortgage loan, in which the lender must go to court to get permission to take the house back from the borrower and sell it. With a deed of trust the foreclosure process is far less complicated than with a mortgage loan. This process favors the lender and it is important for all California home buyers to understand this difference because it can mean losing your home to foreclosure more quickly than with a traditional mortgage loan.

If you are a first time home buyer or you have not had a mortgage loan backed by a deed of trust before, it is a good idea to have a real estate professional, or legal professional explain the deed of trust in some detail so you clearly understand your obligations and the consequences of failing to meet your payback obligation.

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