In the realm of real estate transactions, a crucial document often comes into play: the deed of trust. Whether you're a first-time homebuyer, a seasoned property investor, or simply curious about real estate practices in the Lone Star State, it's essential to understand the Texas deed of trust.
In this post, one of our board-certified real estate attorneys explains what this important legal instrument entails and how it affects property transactions in Texas.
What Is a Deed of Trust in Texas, and When Do You Need One?
A deed of trust in Texas is similar to a mortgage in other states. This legal document gives a lender the right to sell real property if the borrower doesn't pay back a loan. It's often used along with other documents, such as a warranty deed and a promissory note, to secure real estate purchases.
Securing Loans with Real Estate
When you borrow money and use real estate as collateral in Texas, a deed of trust will come into play.
Here's what you need to know about using a deed of trust to secure a loan:
- The owner of the property (usually the borrower) signs the deed of trust to give the lender a lien on the real estate.
- A detailed legal description of the property is essential to ensure that the lender has a valid lien.
- Multiple properties can be used as collateral under a single deed of trust if needed.
- Once the loan is paid off, the lender must file a Release of Lien to remove the lien from the property.
These are just the broad strokes. As you’ll soon come to learn, implementing a deed of trust involves clearly outlining the powers and duties of each of the relevant parties.
Parties Named in a Texas Deed of Trust
In Texas, a deed of trust involves three main parties, each with a specific role in the transaction:
Grantor
The grantor is the property owner and usually, but not always the borrower.
Here are some key points about the grantor’s part in the transaction:
- The grantor must own the title to the property being used as collateral.
- If the grantor owns only a partial interest in the property, the lien applies only to that interest.
- The grantor grants the trustee the power to sell the property if the borrower fails to comply with the loan terms.
This individual or entity grants a lien on their property to secure the repayment of a loan.
Trustee
The trustee plays a unique role in a deed of trust. This person or entity sells the property at a foreclosure sale if there is a loan default and the lender directs the trustee to sell the property.
Here’s what to know about the trustee’s responsibilities:
- The grantor authorizes the trustee to sell the property if the borrower defaults on the loan and the lender directs the trustee to sell.
- The trustee is often a lawyer or an employee of the lender.
- The lender can appoint a substitute trustee at any time, but the grantor cannot.
The trustee takes no action until and if the lender requests the trustee to initiate foreclosure proceedings.
Beneficiary
The beneficiary is the lender to whom the borrowed money is owed. This party benefits from the lien created by the deed of trust. The beneficiary has the right to request that the trustee initiate foreclosure proceedings if the borrower defaults on the loan.
Filing a Deed of Trust in Texas
To be effective, a deed of trust must be properly prepared, signed, and filed with the county clerk where the property is located. The document must accurately describe the property to ensure that the lien is placed on the correct land. As noted, the grantor must own the property being used as collateral for the loan.
If the borrower fails to repay the loan, the lender can direct the trustee to foreclose on the lien and sell the property at auction and apply the proceeds to the debt. The Texas Property Code outlines the specific procedures for foreclosing a deed of trust lien in the state.
Deed of Trust vs. Mortgage
In Texas, a deed of trust is used instead of a mortgage. While their purposes are similar, there are some important distinctions.
The main difference lies in the foreclosure process. With a deed of trust, lenders can pursue non-judicial foreclosure, which is typically faster and less expensive than the judicial foreclosure usually required in other states for mortgages.
Additionally, a deed of trust involves three parties (grantor, trustee, and beneficiary), while a mortgage typically involves only two (the mortgagor and mortgagee). The trustee has the power to sell the property on behalf of the lender if the borrower defaults without going through the court system.
The Texas Property Code outlines specific requirements for non-judicial foreclosures under deeds of trust, including the following:
- Foreclosure sales must be held on the first Tuesday of each month.
- The trustee must provide the borrower with at least 21 days' prior written notice of the foreclosure sale.
- A public notice of sale must be filed and posted with the county clerk containing the correct legal description of the property to be sold.
Seller-Financed Purchases: The Role of the Deed of Trust
In cases of seller financing, where the property seller also acts as the lender, a deed of trust plays a central role. Three key documents are typically involved in seller-financed deals:
- Promissory Note: Outlines the promise to pay for the property, including terms like the loan amount, interest rate, and payment schedule.
- Deed of Trust: Creates the lien on the property to secure the promise to pay made in the promissory note.
- Warranty Deed with Vendor’s Lien: Transfers the property title to the buyer.
In this scenario, like in other loan transactions, the deed of trust grants the seller a lien on the property to secure the loan until the buyer fully pays off the loan.
