What Is a Deed of Trust?
When you buy or sell property in Tennessee, you may start hearing a host of unfamiliar terms. Closing? Contingencies? Disclosure? Deeds of trust? Earnest money? We focused this article on deeds of trust to help you begin to understand the legal terms you may encounter during the transaction process. Deeds of trust are similar to mortgages but different in their mechanics and purpose.
In this article, we answer questions about deeds of trust. For instance, What is a deed of trust, and how does it work? When reading this article, keep in mind that it provides general information. For specific advice on your situation, consider reaching out to an experienced real estate lawyer.
Batson Nolan PLC has been in business for over 160 years. During that time, we have helped thousands of buyers and sellers navigate property transactions successfully under Tennessee and Kentucky law. When providing legal counsel to buyers and sellers, we understand the importance of creating and maintaining client relationships founded on trust, respect, and compassion.
What Is a Deed of Trust in Tennessee?
A deed of trust is a way for a third party (the trustee) to hold an interest in the property while another person (a borrower) performs a promise they have made to someone else (the lender). In the context of deeds of trust, the borrower is the homebuyer who promises to pay the loan amount to the lender. In exchange for completely paying off the loan, the borrower will receive the full title to the property.
Now let’s talk about the nuts and bolts of creating a deed of trust and examine what it does.
Who Are the Parties Involved in a Deed of Trust?
There are three parties involved in a deed of trust in Tennessee:
- The trustee,
- The grantor, and
- The beneficiary.
Each of these parties plays an essential role in properly carrying out a deed of trust under Tennessee law.
Trustee
The trustee is a third party who holds a legal interest in the property on behalf of the lender and borrower. The trustee’s job is to maintain the interest in the property while the borrower makes payments toward the underlying loan. When the buyer pays off the loan, the trustee is responsible for executing a release that they make part of the official property records. If the buyer falls behind on payments (defaults) and goes into foreclosure, the trustee puts the property up for sale.
Borrower (the Grantor)
The borrower (or grantor) is the person who takes out a loan and purchases the property with the debt proceeds. They convey a limited legal interest in the property to the trustee on the condition that the trustee transfers the property back to the borrower when they pay off the loan. The loan or promissory note outlines the borrower’s specific payment obligations.
Beneficiary (the Lender)
The beneficiary (or lender) is the person or institution who provided the borrower with the funds to purchase the property. The trustee and borrower have interests in the property, but the lender receives the property or the proceeds of the sale if the borrower fails to perform their obligations under the terms of the loan.
How Does a Deed of Trust Work?
A deed of trust is commonly used in Tennessee instead of a mortgage. Rather than the bank owning the property until the buyer pays off the mortgage, a third-party trustee holds legal title in the property during that time.
When the buyer fulfills their obligations under the loan agreement, the trustee and lender sign a release. They typically record this document with the register of deeds office so that it becomes part of the historical documents regarding the property. It puts others on notice that the buyer owns the property free and clear of the lender or trustee’s prior interest in the property.
Many lenders in Tennessee prefer a deed of trust over a mortgage because it puts a third-party trustee in charge of having legal ownership of the property and handling the foreclosure sale if the buyer defaults on the mortgage. In the absence of a deed of trust, the lender would instead bear responsibility for these obligations, which can use up valuable time and resources.
What Is the Difference Between a Deed of Trust and a Mortgage?
Both mortgages and deeds of trust involve a debtor and a lender, but there are subtle differences between the two arrangements that impact their uses. Under a mortgage, the lender owns the property until the borrower pays off the entirety of the loan. But with a deed of trust, a trustee owns the property until the borrower fulfills their requirements under the debt agreement.
Contact Our Skilled Attorneys at Batson Nolan PLC
Navigating a real estate transaction can be exciting, but it comes with challenges. Further, the legal documents you sign during the transaction legally bind you to specific terms. Failure to understand or meet those obligations can have serious consequences. But an attorney can help ensure you know your rights and do not sign up for anything that unfairly disadvantages you.
Our team consists of reputable and knowledgeable real estate attorneys. Christina Bartee is an accomplished real estate attorney whose philosophy of practicing law is to listen to her clients and work together to create a roadmap to achieve a common goal. She thoroughly enjoys helping clients resolve complicated life decisions.
If you have questions about deeds of trust in Tennessee, contact our office today to schedule a consultation.