QWe recently went to settlement on our first home, and the person conducting the settlement had us sign a number of documents, including one called a "deed of trust." I asked the settlement officer what that was, and he said it was the mortgage on our property. Why is it called a deed of trust? What's the difference between a deed of trust and a "deed"?
AWhether you are a first-time home buyer or an experienced professional investor, you are entitled to get all of your questions fully answered when you go to settlement. There are too many settlement officers -- including lawyers -- who treat a settlement as if it is just a routine procedure that is required by the lenders.
That is not the way it should be. A settlement is, in effect, both the end of the buying process and the beginning of homeownership. As a buyer, you should fully understand each document you sign. You should not be rushed through the process just because there is another settlement waiting in the reception room.
At settlement (called "escrow" in some areas), the buyer signs a number of legal documents. Each of these documents is significant, and can have a major effect on your life and your home in the future. While there are a huge number of papers you have to sign, the most important ones are the promissory note, the settlement statement (called a HUD-1) and the deed of trust.
The seller will also have to sign a number of documents, most notably the deed and the settlement statement.
The settlement statement is a summary of the transaction that lists the amounts of money being paid by whom, for what. Review it closely to make sure there are no surprise charges or anything else you weren't expecting. Keep your copy permanently; you need it for tax purposes. Actually, you should keep a permanent file of all the papers you receive at the settlement.
A deed is the document that legally conveys the property to you. The seller should read it carefully, and confirm that the legal description contained in the deed is correct. The buyer doesn't sign the deed, but should review it anyway, because it will be recorded among the land records in the jurisdiction where the property is located.
There are three important things in a deed that a buyer should review:
* Is the legal description correct? Ask the person conducting the settlement to compare the legal description in the deed to the description in the title binder that the settlement company got when it obtained the title search from land records. I would rather catch mistakes now, before that deed has been recorded.
* Are the names spelled right? The seller is the grantor, and the buyer is the grantee. Titles are searched in what is known as a "grantor" index. If a name is misspelled, there will be problems when you sell or refinance your house.
* How are you taking title to the property? This will be spelled out in the deed. If you are purchasing your house in your own name, the deed will state "as sole owner." If you are taking title with your spouse, the deed will usually state "as tenants by the entirety." If you are taking title with a friend, the title will either be held as "tenants in common" or as "joint tenants with rights of survivorship."
It is important to discuss how you are going to take title with your own lawyer, before settlement. Unless the person conducting the settlement is your own lawyer, that person should not give you legal advice. If the settlement officer does offer legal advice, you should not rely on it.
The promissory note is the IOU; you agree to pay the lender the full amount of the loan, at the interest rate stated in the note, for the number of years that you obtain the loan. This is a very important document, and you should not only read it carefully at settlement, but also get a copy of this document before you leave the settlement office.
And how about the deed of trust? The settlement officer was correct: It is the mortgage document. My legal dictionary defines it as follows: "An instrument used in many states in place of a mortgage. Property is transferred to a trustee by a borrower (trustor), in favor of the lender (beneficiary), and reconveyed upon payment in full."
Although the laws on deeds of trust vary from state to state, here is an oversimplified explanation.
In the early history of mortgage lending, lenders used only a mortgage document. This was recorded among the land records, and if the borrower defaulted on the mortgage payments, the lender had to go to court to foreclose. From the lender's point of view, this was time-consuming and expensive.
Accordingly, many years ago, some imaginative lawyer (or lender) conceived of the idea of the deed of trust. At settlement, the seller would convey the property by deed to the buyer. The buyer would simultaneously convey the property -- in trust -- to one or two trustees selected by the lender. In effect, legal title (in many states) would be transferred to these trustees. The trustees would hold this legal title until one of two events occurred:
* The loan was paid off in full. Then the trustees (usually at the expense of the borrower) would convey the property back to the borrower, and release the deed of trust from land records.
* The loan went into default. Because the trustees owned the property, and the deed of trust contained language giving the trustees the power to sell the property upon a default, the trustees would arrange to have the property foreclosed upon by a private auctioneer (or the sheriff in some parts of the country, on the courthouse steps). If the borrower objected to the foreclosure, and believed he had legal defenses, the burden to go to court to stop the foreclosure shifted to the borrower.
Thus, a deed of trust is an important document. It will usually contain such important provisions as:
* Due on sale clause: If the property is sold or transferred, the loan becomes automatically due. In other words, the loan cannot be assumed by a subsequent owner.
* Prepayment penalty: Will you be charged a penalty if you pay off the loan before its due date? This is especially important in today's market, because many people are refinancing as often as once a year to take advantage of lower mortgage interest rates. Before you decide to refinance, make sure that there is no prepayment penalty included in your deed of trust.
Books can (and have been) written about deeds of trust, and there are literally thousands of court opinions interpreting the language of these documents. You don't need to know all that detail. What is important is that you understand all of those documents you signed, and get copies before leaving the settlement office.
Benny L. Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036. Readers may also send questions to him at that address.