The deed of trust, Arizona lenders security of choice

Once you have decided to take the plunge and purchase a winter home in the Grand Canyon State, you will have a slew of information to consider. One of the first will come as you prepare to close on your property. As you are sitting at the Closing, and signing all of the required documents, one you will receive which may be unfamiliar to you is the Deed of Trust. The Deed of Trust is the primary security document used in Arizona.

There are many similarities between the Deed of Trust and the Mortgage, which is what most Iowa property owners are familiar with, but there are significant differences as well, which a prospective owner should be aware of before buying in Arizona. In general, Deeds of Trust and Mortgages serve the same function they secure the repayment of a loan made by a lender, against specified real property. In a purchase situation, the real property the loan was used to acquire will serve as the secured collateral. The Deed of Trust, or Mortgage, is executed and recorded in the county in which the property is located. Any future purchaser of that property will need to pay off the loan, and receive a release of the Deed of Trust, or they will take title to the property subject to such Deed of Trust.

A mortgage operates in the same way, both here in Iowa, and in Arizona, where mortgages are rarely used. One small difference is the parties to each document. Normally a Mortgage has only two parties the borrower and the lender. Under a Deed of Trust, there are generally three parties the borrower, the lender and the Trustee, who holds title to the lien for the benefit of the lender and whose sole function is to initiate and complete the foreclosure process at the request of the lender. Statute specifies who can serve as a Trustee under a Deed of Trust, and it is generally a title company, escrow company or attorney. The biggest difference between the Deed of Trust and the Mortgage is what happens after a default. Under Arizona law, a Mortgage can only be foreclosed judicially. This means the only way to foreclose a mortgage is to file a law suit, obtain a judgment approving the foreclosure, wait for the sheriff's sale to sell the property, wait out any redemption period the owner may have. Needless to say, it can be a fairly long and expensive process.

Deeds of Trust, on the other hand, can be foreclosed either judicially, using the same process as mortgages, or non-judicially, in accordance with Arizona law, and the power of sale in the Deed of Trust. Basically, following a default under the Deed of Trust, the lender can initiate the foreclosure by recording a Notice of Trustee's Sale, waiting the statutorily required period (at least 90 days) and then proceed to sell the property at a Trustee's sale. This is a broad simplification, and the lender must follow the statutory scheme in order to validly sell the property, but it is much simpler than a judicial foreclosure. Also, unlike following a judicial foreclosure, there is no right of redemption. There is, however, a right of reinstatement prior to the Trustee's sale to bring the loan current and reinstate the Deed of Trust. This process is much shorter and less expensive that a judicial foreclosure, which explains why the Deed of Trust is the predominant security device in Arizona.

Attorney Jeff Baxter is licensed to practice in Iowa and Arizona.

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.