Promissory notes, deeds of trust, and mortgages

Two documents, two jobs

A promissory note is the borrower's written promise to repay a debt. It states financial terms such as principal, interest, payments, and maturity. A mortgage or deed of trust makes identified real property security for the obligation. The note evidences the debt; the security instrument ties repayment to the property. A note can exist without real estate security.

Match the parties

A mortgage has two principal parties: the mortgagor gives the security and the mortgagee receives it. Think borrower and lender, respectively. A deed of trust has three roles: the trustor gives the security, the beneficiary receives its benefit, and the trustee holds limited title for security purposes and performs authorized functions such as reconveyance or a trustee's sale. The trustee does not become the home's beneficial owner or the borrower. California commonly uses deeds of trust; despite the title terminology, they function as liens securing obligations, and the borrower ordinarily retains possession.

The borrower, called the trustor, gives a promissory note to the lender, called the beneficiary. That connection represents the repayment promise. A separate deed of trust connects the borrower's property security to a trustee for the beneficiary's benefit. The trustee has a limited security-related role, not beneficial ownership of the home. — Separate the debt promise from the property security.

Read the clauses by their effect

An acceleration clause permits the unpaid balance to become due early after a specified trigger, such as default. A due-on-sale clause concerns acceleration upon transfer. A power-of-sale clause authorizes a nonjudicial sale through legally required procedures; it is not a promise of immediate repossession. A mortgage can also contain a power of sale. California Civil Code section 2924.5 requires a covered transfer-acceleration clause to appear in full in both the security instrument and the note or other debt document for property with four or fewer residential units, including planned units. Enforcement of a particular transfer clause can also depend on federal law and protected-transfer exceptions.

Follow the payoff

When the secured debt is paid, distinguish a mortgage discharge from a deed-of-trust reconveyance. Under California Civil Code section 2941, the mortgagee must execute and record, or cause recordation of, the mortgage discharge within 30 days after satisfaction. For a deed of trust, the beneficiary has 30 calendar days after satisfaction to deliver the note, deed of trust, reconveyance request, and necessary documents to the trustee. The trustee then has 21 calendar days after receiving the required documents and fees to execute and record, or cause recordation of, the full reconveyance. These are different actors and different starting events. Reconveyance releases the security interest; it is not a new sale to the borrower.