There are many documents and contracts involved in real estate transactions, and trying to understand all of them can get a little overwhelming.
One that we find people often have questions about is the deed of trust.
What is a deed of trust?
A deed of trust is a legal agreement used in real estate transactions that establishes a piece of property as collateral for a loan, much like a traditional mortgage.
The deed of trust is signed by the borrowing party and recorded with the register of deeds where the property is located. The legal description of the property is included and used as collateral.
Unlike a mortgage, a deed of trust involves three parties instead of two:
- The borrower, aka the trustor
- The lender, aka the beneficiary
- The third party who holds the title, aka the trustee
While with a mortgage the borrower holds the title to the property, with a deed of trust title is held by the third party trustee until the loan is paid off or the trustor defaults. In North Carolina, this third party is typically a title company.
Should the borrower default on the loan, the trustee forecloses on the property, sells it, and then distributes the money from the sale to the proper party accordingly.
Deeds of trust are usually most beneficial for the lender, or beneficiary, in the transaction. This is because a deed of trust typically makes it easier for a lender to foreclose on a property because most have a “non-judicial foreclosure” clause, which allows the lender to foreclose on the property without having to wait for the court system to review and approve the foreclosure process.
Most institutional lenders include an acceleration clause on a deed of trust, which allows them to demand that the buyer pay the loan off in full if they default or convey the property without written consent of the lender. Once the loan is accelerated, it can no longer be paid in installments.
Deeds of Trust in Real Estate Transactions
The majority of the time a deed of trust is used in a real estate transaction in North Carolina, it will be a purchase money mortgage, or a mortgage issued to the borrower by the seller of the home as part of the purchase transaction, unlike a traditional mortgage which is obtained through a bank. A purchase money mortgage is typically used in situations where the buyer cannot qualify for a loan through a traditional lender, or in situations where the buyer takes over the seller’s mortgage.
Race Notice State
North Carolina is a pure race jurisdiction, which NC General Statute 47-18 defines as a jurisdiction “in which the first to record an interest in land holds an interest superior to all other purchases for value, regardless of actual or constructive notice as to other, unrecorded conveyances,” meaning that the first person or entity to record a deed or a lien against a property has priority against all subsequent grantees and/or lien holders, with the exception of liens for State taxes, which North Carolina grants “super priority.”
If a beneficiary records a deed of trust as soon as the loan transaction is settled, the deed of trust will hold priority over any other lien recorded against the same property after that. Most lenders will require that they are “first in lien” before providing a loan, meaning that they hold the first lien position and require all other liens on the property to be satisfied prior to theirs. This is one of the many reasons why lenders require a title search prior to closing, as well as title insurance.
Let Starling, Rodriguez, & Associates Guide You
Navigating the different kinds of documents and contracts involved in real estate transactions can get confusing quickly. The experienced real estate attorneys at Starling, Rodriguez, & Associates can help explain them to you and help you figure out what’s best for your needs. Contact our office to make an appointment today and put our guidance on your side.