DOT / PROMISSORY NOTE Flashcards
PROMISSORY NOTE AND DEED OF TRUST
A promissory note and deed of trust have one simple function to secure the repayment of a loan by placing a lien on the property as collateral. If the loan is not paid, then the lender has the right to sell the property. Both documents are used to make sure the seller secures the repayment of the loan.
PROMISSORY NOTE
A promissory note is a document that states a promise to pay the debt and is signed by the borrower. It contains the terms of the loan including information such as the interest rate and other obligations.
Promissory notes may also be referred to as an IOU, a loan agreement, or just a note. It’s a legal lending document that says the borrower promises to repay to the lender a certain amount of money in a certain time frame. This kind of document is legally enforceable and creates a legal obligation to repay the loan.
DEED OF TRUST (ALSO CALLED A TRUST DEED)
A deed of trust, also called a trust deed, is a legal agreement made at a property’s closing. It is a type of secured real estate transaction used in some states in place of a mortgage. The individual purchasing a property and a lender make this agreement, which states that the property buyer will repay a loan. A third party, known as a trustee, holds the property’s legal title until the loan gets paid in full.
A deed of trust is the security for a loan and gets recorded in public records. Some states will require a borrower to sign a deed of trust to take out a home loan, much like other states require signing a mortgage. Fundamental differences exist between deeds of trust and mortgages, however. For example, a deed of trust requires more people to be involved in the property sale than a mortgage would. Only a mortgage gets executed through the judicial system.
The deed of trust secures the house and land to the note and allows a lender to foreclose on a property if there is default. The most common default is failure to make the payments under the promissory note.
SECURED PROMISSORY NOTE
A secured promissory note is an obligation to pay that is secured by some type of property. This means that if the payor fails to pay, the payee can seize the designated property to obtain reimbursement of the loan.
WHO HOLDS THE PROMISSORY NOTE?
The lender holds the promissory note while the loan is outstanding. When the loan is paid off, the note is marked as “paid in full” and returned to the borrower.
WHO IS INVOLVED WITH A DEED OF TRUST?
Three parties must be involved with any deed of trust:
Trustor: This party is the borrower. A trustor is sometimes called an obligor.
Trustee: As a third party to a deed of trust, the trustee holds the property’s legal title.
Beneficiary: This party is the lender.
A trustee represents neither the borrower nor the lender. Instead, the trustee is an entity that holds the power of sale in case a borrower defaults. The trustee is typically a title or escrow company.
HOW DOES A DEED OF TRUST WORK?
A borrower gives a lender one or more promissory notes in exchange for the deed of trust. Promissory notes are documents that the borrower signs which state the borrower’s promise to pay back a debt. The promissory note will contain information such as the interest rate along with other obligations of the agreement.
After the borrower pays the deed in full, the trustee will reconvey the property to its buyer. A promissory note is marked as paid in full once the buyer pays the loan entirely, and the property buyer receives the deed.
A trustee may file a notice of default if the borrower does not pay following the terms of the promissory note. A trustee may also substitute a different trustee for handling foreclosure.
DIFFERENCES BETWEEN DEEDS OF TRUSTS AND MORTGAGES
Significant differences between the two documents include the following:
Foreclosure type: The foreclosure type a property owner faces will depend on whether the property owner has a deed of trust or mortgage. Someone who has a deed of trust typically faces a nonjudicial foreclosure, while a lender will need to go through the courts if a mortgage comes into play.
Expense and length of foreclosure process: Since a lender will have to seek judicial foreclosure to take back a property using a mortgage loan, a mortgage generally takes more money and time for foreclosure proceedings. As a result, mortgage lenders tend to use deeds of trust in states that allow them. A lender will almost always spend less time and incur lower costs reclaiming a property when using a deed of trust instead of a mortgage.
Parties involved: Only two parties, a borrower and a lender, are engaged in a mortgage contract. A deed of trust has a trustee, the neutral third party, involved in addition to the borrower and lender.
SIMILARITIES BETWEEN DEEDS OF TRUSTS AND MORTGAGES
The two agreements also have a few significant similarities, including:
Both agreements are distinct from loans: Neither a deed of trust nor a mortgage is a home loan. The loan states that a property owner will pay back a set amount of money to a lender, while both a deed of trust and a mortgage place a lien on a property.
Both agreements allow for foreclosure: Both a deed of trust and mortgage give a lender a method of taking back a property via foreclosure. These agreements essentially state that if the borrower does not follow the loan terms, the lender can put the property into foreclosure.
State law dictates both types of agreements: Both mortgages and foreclosure deeds are subject to state laws. The specific type of contract a lender must use will depend on what is legal in a particular state.
DEED OF TRUST VS PROMISSORY NOTE
A deed of trust often requires a promissory note, but the promissory note is a specific document type. While a deed of trust describes the terms of debt as secured by a property, a promissory note acts as a promise that the borrower will pay the debt.
A borrower signs the promissory note in favor of a lender. The promissory note includes the loan’s terms, such as payment obligations and the loan’s interest rate. However, although the promissory note is usually a separate document, both a deed of trust and a mortgage can be legally considered a type of promissory note.
During the term of a loan, a lender keeps the promissory note, and the borrower only has a copy of the note. Once the borrower pays off the loan, the promissory note is marked as “paid in full.” Then, the borrower receives the note with a recorded reconveyance deed.
