Deed of trust

Key Takeaways

• A deed of trust has three parties: the borrower, called the grantor, the lender, called the beneficiary, and a neutral trustee.
• The trustee holds bare legal title only as security, while the borrower keeps equitable title, possession, and the duty to pay taxes and insurance.
• The power of sale clause is what lets the trustee foreclose by auction without filing a lawsuit, which Washington calls a trustee's sale under RCW 61.24.
• After a Washington trustee's sale the lender generally cannot pursue a deficiency judgment against the borrower (RCW 61.24.100).

What It Means

A deed of trust is the security instrument Washington lenders use to tie a home loan to the property. Three parties sign on: the borrower, called the grantor, the lender, called the beneficiary, and a neutral third party called the Trustee, usually a title company or an attorney. The borrower conveys legal title to the trustee, who holds it in trust until the debt is satisfied (RCW 61.24.020). The borrower keeps equitable title, lives in the house, and gets the property back free of the lien through a reconveyance once the loan is paid.

The deed of trust is not the debt. The debt lives in the Promissory Note the borrower signs at the same closing. The deed of trust is what gives the lender collateral, and its most important clause is the power of sale, which lets the trustee sell the property at public auction if the borrower defaults. That power is what makes a Washington foreclosure a trustee's job rather than a judge's.

How It Works in Washington

Washington's Deed of Trust Act, RCW 61.24, sets out how these instruments are created and enforced. Because the trustee already holds title under a power of sale, the lender does not have to file a lawsuit to reach the property. It directs the trustee to run a Non Judicial Foreclosure. RCW 61.24.040 requires the trustee to record and give notice of the sale at least 90 days before the sale date, or at least 120 days when the pre-foreclosure letter under RCW 61.24.031 is required.

The borrower gets a matching set of protections. Under RCW 61.24.090 the borrower can stop the sale at any time before the eleventh day ahead of the sale date by curing the default, which means paying the entire amount then due plus the trustee's costs and fees, but not the principal that would not yet be due had there been no default. Under RCW 61.24.100 a lender who takes the house through a trustee's sale generally gives up any Deficiency Judgment against the borrower for what the sale did not cover. And under RCW 61.24.050, once that sale is done no one has a right to redeem the property.

Example

Maria buys a house in Spokane for $420,000. She puts $84,000 down, which is 20 percent, and borrows the remaining $336,000 from a credit union. At closing she signs two documents: a promissory note for $336,000, which is her personal promise to repay, and a deed of trust on the property, which is the security for that promise.

The deed of trust names Maria as grantor, the credit union as beneficiary, and Cascade Title Company as trustee. It is recorded with the Spokane County Auditor, so anyone searching title sees the credit union's interest. Maria lives in the house and pays the property taxes, because equitable title and possession stayed with her.

Fourteen years later Maria sells. Escrow pays the credit union the remaining balance, the beneficiary tells the trustee the debt is satisfied, and the trustee records a deed of reconveyance releasing legal title back to Maria, so she can deliver clear title to her buyer.

Common Mistakes and Exam Traps

• A deed of trust has three parties while a mortgage has two, the mortgagor and the mortgagee, so counting parties is the fastest way to tell the two instruments apart on an exam.
• The deed of trust secures the debt but the promissory note is the debt, so a question asking which document contains the borrower's promise to repay is asking about the note.
• No one may redeem the property after a Washington trustee's sale (RCW 61.24.050), so an answer offering a post-sale redemption period following a nonjudicial trustee's sale is wrong.
• A deed of trust is not a deed of reconveyance; the reconveyance is the later document the trustee records to return legal title once the debt is paid.