- Some states operate as title theory states, whereby the property title is in trust until the borrower fulfills his obligations under the trust deed agreement. The trust deed authorizes the trustee to undergo a non-judicial foreclosure upon the borrower’s default, which does not include any court action. Some states operate as lien theory states, whereby the mortgage borrower holds the deed to the property, and the lender places a lien on the property. The major difference between the two is the foreclosure process and who owns title to the property during the mortgage term.
- Under a trust deed, a mortgage borrower can enter into default status, which causes the trustee to initiate a foreclosure sale. These reasons may include missed payments, failure to pay property taxes, failure to provide insurance on the property and pay other obligations that are required by the deed of trust agreement.
- The trust deed authorizes the trustee to sell the property upon the borrower’s default. This process is called a foreclosure by power of sale, which is different from a judicial foreclosure; the mortgagee has the power to obtain a judicial foreclosure under a mortgage agreement upon default. When the trustee sells the property upon the authority in the trust deed, the mortgage borrower has no right of redemption and may not regain title to the property. The proceeds from the foreclosure are paid to the lender, and the borrower receives any surplus from the sale of the property.
- Before beginning the foreclosure sale, the mortgage lender is required to serve a notice of default to the borrower. The notice of default includes a description of the default and information regarding the foreclosure costs and fees. The lender has discretion to reinstate the loan, if the borrower pays the default amount prior to the foreclosure sale. The lender also may choose to allow the borrower to establish other arrangements to cure the debt, such as extended payment arrangements or additional time to pay the default balance.
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