How Does a Deed of Trust Work in Foreclosure?

How Does a Deed of Trust Work in Foreclosure?
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A deed of trust is a real estate document or security instrument that involves three parties: the trustor, the beneficiary and the trustee. The trustor is the purchaser of a home, the beneficiary is the bank or lender and the trustee is a neutral third party who actually holds the deed for the beneficiary. The trustee's primary objective is to deliver the deed at the time the loan is paid in full or to carry out a foreclosure in case of default. This is called a trustee's sale.

Deed of Trust vs. Mortgage

The term "mortgage" is often used interchangeably with a deed of trust as both financial instruments secure the promissory note that says the borrower will pay the lender a specific amount of money for a property. The main difference between the two types of security documents is the number of parties involved. A mortgage involves two parties -- the borrower and the beneficiary, or lender. A deed of trust involves an additional party, the trustee, whose main purpose is to initiate a foreclosure, if necessary. The other main difference between a deed of trust and a mortgage is that a mortgage foreclosure requires judicial involvement.

Nonjudicial Foreclosure

If a buyer falls behind on house payments with a deed of trust, the trustee can begin foreclosure proceedings as detailed in the deed of trust document. Unlike a mortgage, a deed of trust does not require a judicial foreclosure; the courts do not have to be involved to foreclose. This is a substantially less complicated process than a judicial foreclosure. As a result, the beneficiary can foreclose on the home much sooner than with a mortgage.

Anti-Deficiency Rule

A huge advantage for a borrower who is facing foreclosure proceedings with a deed of trust is the anti-deficiency rule. This means that in a nonjudicial proceeding, such as a deed of trust foreclosure, the lender cannot sue the borrower for the deficit of the loan in case the auction sale amount does not cover the balance. With a mortgage, foreclosure proceedings involve the court, and any remaining balance owed after an auction can be sought by the lender.

House as Collateral

In a deed of trust foreclosure, the home itself is the collateral; a bank or lender cannot attach any other assets or personal property. Once the home is sold, whether or not the sale amount is enough to cover the liability, the loan has been satisfied. Homeowners involved in a nonjudicial foreclosure do not need to worry about garnished wages or seizure of their bank accounts or other assets the lender might use to pay off the loan amount.

No Right of Redemption

After a trustee's sale or foreclosure on a home with a deed of trust, a borrower in most states does not have the right of redemption. That is, a homeowner who has lost her home through default and nonjudicial foreclosure does not have the right to buy the house back from the purchaser. So even if her financial situation improves, a homeowner cannot repurchase the foreclosed home.