After obtaining a loan from a bank and purchasing a property in Utah, most buyers understand that they have a “mortgage.” However, most lenders and buyers in Utah do not enter a true mortgage relationship. Rather, most loans in Utah related to real property—such as loans to purchase a residence—include a trust deed, not a mortgage. Trust deeds are also used to secure other types of loans, including construction loans from lenders to general contractors. This post explains how a promissory note is secured by a trust deed and what rights a Utah lender has under a trust deed if it is not paid in full.
The Contract or Promissory Note
A promissory note (or note) is the contract the debtor (the party obtaining the loan) signs that sets forth the debtor’s promise to repay the lender. It explains the monthly payment obligation and the interest rate, among other terms the debtor promises to fulfill. If all that existed in a sale for real estate were a promissory note, few lenders would be brave enough to extend loans. Although a valid contract, a promissory note alone is, in some sense, merely an IOU that provides little guarantee that the lender will be repaid. If a debtor breaches a valid contract that is not “secured” or guaranteed by collateral, the lender generally has to go to court to get a judgment and then, after getting a judgment, hope that he or she can find some assets of the debtor to use to repay the amount being owed. To have more confidence in repayment, lenders generally require a loan contract with a debtor to be secured by substantial collateral.
The Trust Deed (Securing the Promissory Note)
Through a trust deed (also called a deed of trust), the lender obtains rights in physical, tangible property that secures repayment of the loan. This is how it works. The trust deed relationship involves three parties: the debtor, the lender, and the trustee. After the debtor receives title to the property as part of the sale, the debtor in turn transfers legal title to a trustee (the debtor still holds what is referred to as equitable title). The trustee is obligated to hold legal title to the property during the loan term for the benefit of the lender (known as the “beneficiary” of the trust deed). The trustee does so until the debtor either pays off or defaults on the loan. If the debtor pays off the loan, the lender (or beneficiary) tells the trustee to transfer legal title back to the debtor who then holds legal title free and clear of the interests of the lender. On the other hand, if the debtor defaults and fails to pay the lender in full, the lender instructs the trustee to sell the property and use the proceeds of the sale to repay the lender.
Default and Foreclosure through a Trustee’s Sale (a Non-Judicial Sale)
Perhaps the main real difference between a mortgage and a trust deed is the foreclosure process. If a buyer defaults in a mortgage relationship, the lender is forced to get a judgment from a court before it can sell the property. This long and usually difficult process is called a judicial foreclosure. On the other hand, the process of foreclosing on a trust deed is known as a non-judicial foreclosure. Stated in simple terms, the non-judicial foreclosure process requires the trustee to record a notice of default with the county recorder’s office in Utah where the property is located, wait three months, record a notice of sale, wait a few more weeks, and then sell the property on the steps of the county courthouse at auction to the highest bidder. In addition to recording these two documents, the trustee must provide certain notices to the debtor and to the public, including publishing notice of the sale. If the trustee follows the proper steps required by law, the trustee’s sale extinguishes the debtor’s interest in the property. And the process can take as little as about four months.
Preventing a Foreclosure After Default
During the three-month period between when the trustee records the notice of default and when it records the notice of sale, the buyer can usually reinstate or pay off the loan. These are rights guaranteed under Utah law under most circumstances. Reinstatement means that the buyer comes current on the loan by paying both the past amounts due as well as the fees related to the foreclosure process. At any time before the actual sale, the buyer can pay off the loan, which requires payment of both the outstanding loan balance as well as the foreclosure expenses. However, once the sale occurs, the debtor is out of luck. He or she cannot get the property back—or redeem the property.
Legal Help with Securing a Transaction or Addressing a Foreclosure
If you are entering a loan and need to secure it with real property, a trust deed lawyer in Utah can help you draft, execute, and record the proper documents. A good trust deed lawyer can also act as the trustee for a non-foreclosure sale or assist a debtor who has defaulted and triggered the non-judicial foreclosure process leading up to a trustee’s sale. If you need this kind of help, let me know. I offer a free consultation. My direct dial is 801-365-1021, and you can e-mail me at [email protected].