Lenders with security properties located in nonjudicial states rely on several documents to allow them to foreclose on a property should a borrower fall into default. While the terms “mortgage” and “deed of trust” are often used interchangeably, the deed of trust alone features language that allows the lender to foreclose the property nonjudicially, should the need arise. Another document that contains this language is a promissory note. Both documents are integral to the creation of a secured loan, and both play different roles in the foreclosure process.
How is a Promissory Note Different from a Deed of Trust?
Both a deed of trust and a promissory note might outline similar information, but they are separate documents that are signed for the benefit of different parties. In a deed of trust, there are three parties involved: the lender, the borrower, and the third-party trustee. The deed of trust secures the loan by holding the commercial property as security. The deed of trust outlines the terms of the loan.
The borrower accepts the deed of trust by signing the promissory note. The promissory note is a document that outlines the terms of the loan and the following procedure should the terms not be met. It also includes language of the borrower’s promise to pay the loan.
Once the promissory note is signed and the loan is enacted, the deed of trust is held by the third party trustee until the loan is entirely paid off. Once the loan is satisfied, the deed of trust is transferred to the borrower. The promissory note, meanwhile, is held by the lender until the loan is satisfied. Once the loan has been paid in full, the lender will return the document to the borrower alongside a deed of reconveyance.
Why is a Promissory Note Important in a Foreclosure?
Because borrowers sign an agreement to pay the loan according to the terms of the promissory note, lenders have a right to enact a foreclosure should the borrower fail to fulfill the terms of the note. The promissory notes gives lenders the right to enact a nonjudicial foreclosure —a foreclosure that can be enacted without first going to court.
What to Do if a Borrower Defaults
There are many steps that can follow after a borrower falls into default. If all options and mediations have fallen through, the lender will have no option left but to foreclose on the property, which, for lenders enacting their first foreclosure, can be complicated and confusing.
A third-party foreclosure service like Total Lender Solutions can assist small and medium lenders with their nonjudicial foreclosure, freeing your team up to focus on your customers. We operate in California, Arizona, Washington, Oregon, Nevada, Texas, and Missouri. Contact us today to learn how we put over fifteen years of experience and knowledge to use protecting your assets.
