After the mortgage note, the second most important document within a mortgage closing package is the Deed of Trust. While the Note establishes the terms of the loan (the loan amount; the terms of repayment, etc.). The Deed of Trust is what ties the Note to the Collateral. That is, it establishes the lien against the property.
Depending on state, the Deed of Trust may be referred to as the “Mortgage” document. In either case, lenders will sometimes refer to the document as the Security Instrument so that they are referring either to the Mortgage or Deed of Trust, depending on state law. The reason for the difference has to do with who holds the title to the property while the note is still outstanding. In Deed of Trust states, a third-party referred to as the “trustee” hold title to the property as long as the note is being paid as agreed by the borrower. If the borrower defaults, the trustee executes a document called the substitute trustee deed which turns the property over to the lender. In a mortgage state, the lender who makes the loan already holds title to the property. Since the functions are the same, this blog will refere to the Deed of Trust as it is the most common form among the states.
The Deed of Trust establishes the lien on the property and further establishes the conditions by which the borrower can remain in the property. Some refer to the Deed of Trust as the “no pay – no stay” document. And this is te primary function of the Deed of Trust. If the borrower does not pay as agreed, the property can be foreclosed upon by the lender and evict the borrower from the property.
However, there are other provisions within the Deed of Trust that prohibits certain behaviors by the borrower. For example, it will state that the borrower must take occupancy of the property within 60 days of the settlement date and reside in the property as their primary residence for a member of 12 months after the settlement date. There is a waiver of that provision for second homes and investment properties.
Other clauses within the Deed of Trust will cover items such as forbidding the borrower from committing “waste” or put more simply, neglecting the maintenance of a property. It will forbid the borrower from using the property altering the residential nature of the property or making alterations to the property which will reduce the value. There is a long list of clauses within the mortgage document.
As mentioned in a previous paragraph, there may be an occasion where the property is being used for a second home or an investment property. In those cases, a “rider” will be attached to the Deed of Trust. The ides is that it “rides” along with the Deed of Trust. Besides the investment home or condo rider, the most common riders will be condo project, Planned Unit Development (PUD) projects, Balloon Riders, or Adjustable Rate Riders.
The Deed of Trust contains many different clauses and time and space do not allow for a complete review of all of the clauses within the Deed of Trust. For more information on the the Deed of Trust, contact your Googain Loan Officer for more information.