How Does a Deed of Trust Work in Foreclosure?

A deed of trust is a legal document that some states use in lieu of a mortgage. In these states, when you take out a loan to buy property, a third party called a trustee technically owns the property. Typically the deed of trust foreclosure process is managed by the trustee if the borrower defaults on the loan. In most states with deeds of trust, trustees are private people or organizations; however, in Colorado, they are public officials.

A deed of trust is a legal document that's used when someone buys a house with a loan in a certain state. Unlike a mortgage, which gives the lender an interest in a property that can be used if the borrower stops paying, a deed of trust legally transfers rights in the property to a third party called a trustee, who holds on to those rights until the loan is paid off or the property is sold.

If a borrower stops making payments on a home, the lender can communicate that to the trustee and ask the trustee to begin a foreclosure process. This generally can result in the sale of the property to pay off the rest of the debt. If there's money left over, those funds go to the borrower. Many states don't allow the lender to collect any more money from the borrower if the property is sold for less than is owed.

Mortgages and deeds of trust are usually filed, or recorded, in the local land records office. This is typically run by a city, town or county where the property is located. Deeds of trust are usually matters of public record and available to inspect either in person or online. Both types of legal document serve essentially the same purpose: making sure that lenders are comfortable offering money to buy homes by ensuring that they can legally sell the underlying property if needed.

Technically the term mortgage refers to the legal structure that gives a lender an interest in a property, not the loan itself. In practice, the term "mortgage" is often colloquially used to refer to any home loan, including one backed by a deed of trust rather than a mortgage.

Some states allow either a deed of trust or a mortgage depending on the preferences of borrowers and lenders. Mortgages are more common in U.S. states closer to the East Coast, while deeds of trust are more common in states further to the west.

A key difference in deed of trust states versus mortgage states is that there is typically no court process required to foreclose on a property in a deed of trust state unless there's a legal dispute that one or more of the involved parties bring to court. This can make the process faster and less expensive than in states that require what's called a judicial foreclosure, with mandatory court hearings.

Once the property is sold, either at auction or otherwise depending on state requirements, the funds to pay off the loan go to the lender, and anything left over goes to the borrower. The trustee is required to be a neutral third party and not try to influence the price to either party's benefit. In some cases, a trustee that specializes in foreclosures may effectively take over from the existing foreclosure to carry out the procedure.

Exactly how the process works varies from state to state and may vary further based on the exact parameters of the original loan and the deed of trust. If you have questions or think that your legal rights may have been violated, you should consider contacting a real estate attorney with expertise in your area. Since time is often of the essence when it comes to foreclosures, it can be good to get at least a preliminary consultation with a lawyer early in the process.

The exact details depend on the state, but usually if a borrower falls behind on payments, there is a period where he or she can catch up before the property can enter foreclosure. Normally the trustee must issue notice to the borrower that the loan is in default and offer a minimal time period to catch up. This will typically be spelled out in the notice. The borrower might have to pay additional fees, interest and penalties after falling behind.

If that time period expires, the trustee will typically give another required, written notice that the property will be sold. The trustee will also usually give public notice that the property will be sold, letting people know that it is on the market to help it sell for a price that's beneficial to both the borrowers and lender.

While deeds of trust typically don't have to go to court for a foreclosure, it's often possible for a borrower to challenge improper behavior by the lender or trustee and potentially stop an invalid sale by filing a lawsuit. Consult a lawyer if you need help exploring your options.

Often lenders do not want to go through the hassle of a foreclosure, even in states that make it relatively easy. They can risk losing money on a property and must go to the expense of hiring lawyers and working with trustees, courts or whatever the local process requires.

This means that it's sometimes possible to negotiate with a home lender to keep your home even if you are legally at risk for foreclosure. You may be able to negotiate a lower temporary rate on your loan or otherwise change the terms. If you do want to leave the home, you may be able to sell it yourself and let the buyer assume the mortgage, even if that's not typically possible under the loan agreement, or sell it for less than is owed on the loan. In some cases, you may be able to transfer the property to the lender to allow both parties to avoid the hassle of a foreclosure.

Colorado has special rules around deeds of trust. Specifically, the trustees who technically hold title to properties and handle foreclosure matters if necessary are not private organizations as in other states. Known as public trustees, they are public officials generally appointed on a county-by-county basis.

Colorado's public trustees are designated to assist borrowers and lenders with the foreclosure and deed of trust system. While they are required to be neutral in the foreclosure process, they can work with borrowers or lenders to find a way to resolve a payment issue without the need to sell the property.

Either borrowers or lenders can contact public trustees for basic information about the foreclosure process in Colorado, although either side might still want to contact a private lawyer for more specific questions.