When a lender makes a loan to finance the purchase of real estate, in almost all circumstances the lender will want to assure repayment of the loan by acquiring a “security interest” in the land. A security interest gives the lender the right to foreclose if necessary.

In some states the document granting a security interest in real estate is called a “mortgage.” In Missouri, lenders obtain a land security interest by having the owner sign a document called a “deed of trust.” The legal effect of a deed of trust is very similar to that of a mortgage, and in Missouri deeds of trust are loosely referred to as mortgages.

There are three parties to a deed of trust:

• The owner of the real estate being subjected to a security interest
• The lender
• The trustee

If the owner of land subject to a deed of trust does not repay the loan as agreed, the lender, subject to certain restrictions, has the right to foreclose. This results in the sale of the real estate, with the proceeds of the sale being applied to the loan. In general, the steps in the foreclosure process are:

• The lender starts by sending a formal written notice to the land owner that the property will be sold under the deed of trust if loan payments are not brought up to date by a specified deadline.
• If the loan payments are not brought up to date by the deadline, the lender asks the trustee to proceed with the foreclosure sale.
• A legal notice stating the date, time and location of the foreclosure sale must be published for 20 days in a general circulation newspaper in the county where the land is located.
• The foreclosure sale is then conducted as a public action by the trustee, usually on the courthouse steps in the county where the land is located.
• The successful bidder at the sale receives a trustee’s deed, which has the effect of transferring legal ownership of the land to the successful bidder.

At a foreclosure sale, the lender is entitled to bid up to the amount of the outstanding balance on the loan secured by the real estate without actually advancing any cash, so as a practical matter, lenders often end up being the purchasers at foreclosure sales.

The law regarding deeds of trust and foreclosures is complex, and there are protections built into the law for both lenders and borrowers. Depending on the exact wording of the deed of trust and the possible applicability of state statutes and federal regulations, there may be additional steps a lender will have to take in order to properly foreclose, and there may be steps a borrower can take to avoid foreclosure. Also, if proper procedures are followed, a borrower may have the right to redeem (recover ownership) of the land after a foreclosure has taken place. For these reasons, lenders and borrowers facing a foreclosure situation are well advised to consult with an attorney.

Scott Law Firm provides services for both lenders and property owners in the preparation of deeds of trust and in the foreclosure process. Contact us for information on fees and expenses.

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