Most of us do not have enough cash reserves to purchase our home without the assistance of a lender such as a bank or a credit union. If you own real property in Virginia that you purchased by borrowing funds from a lender, then you have most likely signed a document called a deed of trust.
Although ‘deed of trust’ and ‘mortgage’ are often used interchangeably, they are technically two different kinds of documents. A deed of trust — the form used almost exclusively in Virginia and in many other states in place of a true mortgage — is similar to a mortgage in that both create a lien on the property to secure repayment of a loan. This lien gives the lender the right to sell the real property in the event the loan is not repaid. Unlike a mortgage, a deed of trust includes another party to the transaction called a “trustee” who is neither the lender nor the borrower. Who is this mysterious trustee, and why is he or she (or it) part of your transaction?
In a mortgage, the lender holds title to your real property until the loan is repaid in full. In a deed of trust, there is a third party involved — the trustee. The trustee can be a business entity or an actual person like an attorney or a bank employee. Although the trustee is selected by the lender and can be replaced whenever the lender chooses, the trustee represents neither you nor the lender. Rather, the trustee is a fiduciary with duties to both parties. He or she holds title to your real property subject to the terms of the deed of trust, until the loan is paid in full.
If you default, then the lender may direct the trustee to foreclose and sell the property at auction. The trustee will give notice to you by mail, and will advertise the sale in the newspaper. Generally speaking, the trustee is obligated to maximize the sale price for the property — for the benefit of both the lender and the property owner. Upon completion of the sale, the trustee pays the costs of sale and then applies the remaining proceeds to the balance of the loan. The title is then transferred or conveyed to the new purchaser. If the sale proceeds are insufficient to pay the loan in full, then the lender may seek to collect the remainder from the borrower. Less commonly, if the trustee has funds left over after paying the loan and the costs of the sale (including any other liens on the property), the surplus is returned to the borrower.
At the end of the loan, when you have paid back the lender in full, the deed of trust will be released. At that point, the lien against the real property is removed, and the trustee’s responsibilities under the deed of trust are concluded.