Security instrument

Key Takeaways

• The promissory note creates the debt and the security instrument pledges the property, so financing a Washington home takes two separate documents.
• Washington is a lien theory state. RCW 7.28.230(1) says a mortgage is not deemed a conveyance, so the lender cannot recover possession without a foreclosure and sale.
• A deed of trust has three parties (the borrower as grantor, a neutral trustee, and the lender as beneficiary) and can be foreclosed by trustee's sale under RCW 61.24.020.
• The security instrument is recorded and the note usually is not, and RCW 65.08.070(1) makes an unrecorded conveyance void against a later good faith purchaser or mortgagee who records first.

What It Means

A security instrument is the document that ties a debt to a specific piece of real property. Financing a house takes two papers, and students who blur them give away easy points. The Promissory Note is the promise to repay: amount, rate, term, and what counts as default. The security instrument is the pledge that stands behind that promise, giving the lender rights against the property itself if the borrower stops paying. Washington uses two forms of it. A mortgage runs between two parties, the borrower as mortgagor and the lender as mortgagee. A Deed Of Trust adds a third party, a neutral trustee who holds the power to sell the property if the loan goes bad, with the lender as beneficiary. Either way the real estate becomes Collateral, and either way the security instrument is recorded while the note usually stays in the lender's file. Recording is what tells the world the lender has a claim and fixes where that claim ranks against everyone else's.

How It Works in Washington

Washington is a lien theory state, and the statute that makes it one is RCW 7.28.230(1): a mortgage of any interest in real property is not deemed a conveyance, so the owner of the mortgage cannot recover possession of the property without a foreclosure and sale according to law. The borrower keeps title. The lender holds a lien.

Deeds of trust get their own chapter. RCW 61.24.020 says a deed conveying real property to a trustee in trust to secure performance of an obligation may be foreclosed by trustee's sale, that the county auditor records the deed as a mortgage and indexes the grantor as mortgagor, and that no person, corporation, or association may be both trustee and beneficiary under the same deed of trust, with an exception for an agency of the United States government.

The route to Foreclosure is the practical difference between the two instruments, and it carries a consequence borrowers care about. RCW 61.24.100(1) bars a deficiency judgment against a borrower, grantor, or guarantor after a trustee's sale, except to the extent that section permits for deeds of trust securing commercial loans. Judicial foreclosure of a mortgage runs the other way: RCW 61.12.070 directs the court to decree that any balance left unsatisfied after the sale be satisfied from other property of the debtor, unless the lender expressly waived the deficiency in the complaint. Recording sets the order. Under RCW 65.08.070(1) a conveyance that is not recorded is void as against a later purchaser or mortgagee in good faith and for valuable consideration whose conveyance is recorded first, which is why lenders record the day they fund, and why a subordination clause is how a lender agrees to move down that order on purpose.

Example

Nina Petrov buys a $525,000 house in Olympia. She puts $105,000 down and borrows $420,000 from Sound Community Bank. At signing she executes two documents: a promissory note for $420,000 at 6.25 percent over thirty years, and a deed of trust naming Thurston Land Title as trustee and the bank as beneficiary. Only the deed of trust is recorded with the Thurston County auditor. The note stays in the bank's file.

Three years later Nina loses her job and stops paying with $409,000 outstanding. The bank instructs the trustee, and the property sells at a trustee's sale for $395,000, leaving a $14,000 shortfall. Because this was a trustee's sale on a residential loan, RCW 61.24.100(1) bars the bank from pursuing Nina for that $14,000. Had the bank held a mortgage and foreclosed in court, RCW 61.12.070 would have let the decree reach her other property for the same $14,000. One shortfall, two different outcomes, decided by which security instrument was signed at closing. That is worth explaining to a buyer who is still comparing loan types.

Common Mistakes and Exam Traps

• The note and the security instrument are two different documents. The note is the promise to pay, and the security instrument attaches that promise to the land.
• A deed of trust has three parties and a mortgage has two: grantor, trustee, and beneficiary versus mortgagor and mortgagee.
• Washington is a lien theory state, so the borrower keeps title and the lender holds a lien. An answer that gives the lender title is describing a title theory state.
• Under RCW 61.24.020 the same person cannot be both trustee and beneficiary on a deed of trust, with an exception for an agency of the United States government.