You probably know that signing a mortgage involves serious legal commitments, but a deed of trust sounds more like a document that merely involves transfer of title to property. After all, a common dictionary meaning for the word "deed" is "a signed and usually sealed instrument containing some legal transfer, bargain, or contract." Therefore, the terms of a deed of trust may receive less attention in real estate transactions, especially since so much paperwork can be involved in the purchase and sale of real property.
What is a Deed of Trust in Texas?
A deed of trust is in fact a security instrument that authorizes a foreclosure sale outside the judicial system in case of default, and in that respect is more burdensome than a mortgage. The reference to “deed” refers to the transfer of legal title to a trustee who agrees to exercise the power of sale in accordance with the terms of the security instrument. Both mortgages and deeds of trust are permitted in Texas, Tex. Prop. Code Section 51.001(6).
Why are Deeds of Trust Used?
While they serve the same basic purpose, to create a lien upon property to secure repayment of a loan, deeds of trust are much more commonly used in Texas. This is because they contain a power of sale clause under which a designated trustee is authorized to sell the property at a foreclosure sale if the borrower defaults. This makes the process faster and more economical from the lender's viewpoint, and some would say from the borrower's viewpoint as well. No lawsuit need be filed so there is no judicial oversight.
What is the Relationship Between a Note and a Deed of Trust?
A promissory note is often used together with a deed of trust. This is a separate document that specifies the amount of the loan and agreed upon payment terms. If the note is enforceable and the borrower fails to pay the note according to its terms, the deed of trust allows the lender to recoup funds from the sale of the collateral, i.e., the property purchased.
If the sale proceeds exceed the amount of the remaining debt, plus interest, fees and costs as provided in the note, the trustee must disburse those funds to the borrower. It should be noted that other actions or inactions specified in the note and/or deed of trust other than nonpayment of the note, e.g., failure to pay homeowners' association dues, may constitute a default.
What Happens When a Borrower Defaults?
A default will likely lead to a foreclosure sale. A foreclosure sale is one of the most traumatic financial and emotional events that can be suffered by a homeowner or borrower. And the Texas Legislature has responded with a range of protections over the years, including notice of sale provisions and restrictions on deficiency judgments.
Similarly, the courts have involved themselves in a variety of issues that bear upon parties' rights and obligations in attempted foreclosures, for example, the procedures that must be followed to "accelerate" a note, or to declare it due and owing in its entirety.
Some litigants have even invoked emergency orders issued during the COVID 19 pandemic to defend against foreclosure proceedings. West Harwood 334B Land Trust v. Clement, 2021 WL 1229973, not reported in S.W. Rptr.
The Keller Firm Can Help
If you are contemplating the sale or purchase of real estate, it is important to have up-to-date information to draft and negotiate the terms of sale, including any security instruments. Contact The Keller Firm to discuss your matter today.
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