Most purchasers of real estate use a third-party lender, such as a bank, to finance the purchase. The lender requires security for the loan so that if the borrower defaults, the lender can seize the real estate and sell it to repay the loan. Two legal devices are used in different states -- the mortgage and the deed of trust. Texas is a deed of trust state.
Mortgage versus Deed of Trust
A mortgage is a legal security interest that the lender holds against the real estate to ensure repayment of the loan. If the buyer defaults, the bank can foreclose and sell the property. A deed of trust, by contrast, is a document that creates a legal trust the only asset of which is the purchased real estate.
In a deed of trust created incident to a real estate transaction, the borrower is the trust grantor, the lender is the trust beneficiary and the trust is administered by a third party trustee, often an escrow company. The trustee holds legal title to the real estate. The terms of the trust deed set out the terms of the deed including installment payments, interest rates, late penalties and default provisions.
The Role of the Trustee
Texas uses a deed of trust system because the trustee is an independent, disinterested party. If the borrower defaults, the lender will notify the trustee and turn over the deed of trust to him. The trustee then administers the sale of the real estate. He uses the proceeds of the sale to pay the expenses of the sale and the remaining balance on the loan. If any proceeds remain, the trustee delivers them to the borrower. If the borrower completes all payments instead of defaulting, the trustee will deliver a release deed to the borrower. The borrower then uses the release deed to transfer title to the real estate into his own name.
In the event of default, the lender must post a notice of sale on the door of the local county courthouse and file a notice of sale with the court clerk at least 21 days before the date of sale. He must also notify the borrower of the sale. The sale is held as an auction on the county courthouse steps, on the first Tuesday of the month. The trustee administers the sale and transfers title to the new owner of the real estate. The sale price must be paid in cash, and the lender may bid on the property.
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