If you use a deed of trust, either to purchase real estate or to borrow money using your property as collateral, a proper trustee must be part of the transaction. Most states that commonly use deeds of trust instead of mortgages have laws regarding the qualifications of the trustee.
Using a deed of trust
A deed of trust is a legal document used in a real estate transaction either when the purchaser is borrowing funds for the purchase or when an owner of real estate borrows money and uses the property as collateral for the loan. While most states usually use a mortgage instead, a deed of trust is commonly used in some states, so check local laws to find out what is applicable in your situation. Your bank, savings and loan, credit union, or a local title insurer or real estate broker may also be able to give you this information or even help you find a trustee.
A deed of trust involves three parties: the borrower, the lender, and the trustee. In a deed of trust, the borrower is called the trustor and the lender is the beneficiary. The trustee holds title to the property until the trustor has fully repaid the loan to the beneficiary, at which time the lender notifies the trustee, who then transfers full title of the property to the trustor.
Although deeds of trust are sometimes called mortgages, the two documents are actually quite different. With a mortgage, there are only two parties: the borrower, known as the mortgagor, and the lender, or mortgagee. The borrower holds title to the property and the lender has a lien on the property until the loan is fully repaid, at which time the lender executes and records a release of the mortgage.
Deeds of trust are usually preferred by lenders since they may offer simpler foreclosure procedures in the event of default by the borrower.
Commercial lenders and private transactions
If you borrow from a commercial lender, it is most likely that the lender will determine the trustee, which is typically a title company, professional escrow company, or other company in the business of serving as a real estate trustee. Sometimes a real estate broker or an attorney serves in this role.
Some states have laws governing who may or may not serve as a trustee in a deed of trust. Generally, the trustee must be an attorney, title insurance company, trust company, bank, savings and loan, credit union, or other company specifically authorized by law to serve as a trustee. Other states have no limitations. Colorado has a public trustee designated in each county for this purpose.
If you borrow from the seller of the property or another private party, you and the lender need to agree upon a third-party trustee. As with a commercial lender, you may be able to use a title company, escrow agent, real estate broker, or attorney for this purpose.
Whether your trustee is a person or company, you need to make sure they can be relied upon to act impartially and to fulfill the necessary duties and responsibilities. Assistance with property transfers may also be obtained from an online service provider.
