The Veridian Blog

Which two documents are the most critical to review during a loan signing, as far as "legal weight" is concerned?

A promissory note is the binding contract that obligates the borrower to repay the lender.  The terms of any note will include the principal amount, the interest rate, monthly payment and the maturity date.  Another important provision is the Borrower’s Right to Prepay – which may include a prepayment penalty that may leave the unwary borrower in an unsettling position if they try to refinance during the penalty period. 

The Deed of Trust is a very powerful legal document that creates a security interest (lien) in the borrowers home and gives the lender the right to sell the property in case of default.  Technically, the Deed of Trust creates a trust entity with a trustor (the borrower), trustee (usually the escrow company) and the beneficiary (the lender).  Therefore, it grants the Trustee the right to foreclose/take the borrower's home for defaults such as nonpayment of principal and interest, nonpayment of real estate taxes, failure to maintain the property ("waste"), or failure to maintain property insurance and the lender receives foreclosure proceeds as the beneficiary. 

The Deed of Trust is cancelled when the debt is paid and the lien is taken off public record through a Deed of Reconveyance.  Until then, the trustee has the power to foreclose if the debt is not paid.  Be sure to distinguish Deed of Trust from the Grant Deed – which is the document that transfers title and ownership of real property from one party to another.