Question: I plan to go to settlement next week. I contacted the title attorney who will be conducting my settlement and asked that I review all of the papers which I will have to sign before settlement. The attorney was very cooperative, but advised me that many of the legal documents -- especially those which come from the lender -- may not arrive in his office until the morning of settlement. However, the attorney gave me a sample deed of trust for my review. This is a 15 page document, and I just cannot understand the legal language. Exactly what is a deed of trust?

Answer: Oversimplified, it is your mortgage document. My legal dictionary defines it as follows:

An instrument used in many states in place of a mortgage. Property is transferred to a trustee by a borrower (trustor), in favor of the lender (beneficiary), and reconveyed upon payment in full.

Although the laws on deeds of trust vary from state to state, here is an oversimplified explanation of a deed of trust.

In the early history of mortgage lending, lenders used only a mortgage document. This was recorded among the land records, and if the borrower defaulted on the mortgage payments, the lender had to go to court in order to foreclose. From the lender's point of view, this was a time-consuming and expensive process.

Accordingly, many years ago, some imaginative attorney (or lender) conceived of the idea of the deed of trust. At settlement, the seller would convey the property by deed to the buyer. The buyer would simultaneously convey the property -- in trust -- to one or two trustees selected by the lender. In effect, legal title (in many states) would be transferred to these trustees. The trustees would hold this legal title until one of two events occurred:

1. The loan is paid off in full. Then the trustees (usually at the expense of the borrower) would convey the property back to the borrower, and release the deed of trust from land records.

2. The loan went into default. Since the trustees owned the property, and the deed of trust contained language giving the trustees the power to sell the property upon a default, the trustees would arrange to have the property foreclosed upon by a private auctioneer (or the sheriff in some parts of the country at the courthouse steps). If the borrower objected to the foreclosure, and believed there were legal defenses to the foreclosure, the burden to go to court to stop the foreclosure shifted to the borrower.

Thus, as you can see, a deed of trust is a very important document. It will usually contain such important provisions as:

• Due on sale clause: If the property is sold or transferred, the loan becomes automatically due. In other words, the loan cannot be assumed by a subsequent owner.

• Prepayment penalty: Will you be charged a penalty if you pay off the loan before its due date? This is especially important in today's economy, since many people are refinancing as often as once a year in order to take advantage of low mortgage interest rates. Before you decide to refinance, make sure that there is no prepayment penalty included in your deed of trust.

• Insurance requirements: Lenders insist on the homeowner maintaining adequate hazard insurance throughout the term of the loan. In the event the property is damaged (or even destroyed) for any reason (such as fire, explosion, water or lightening), the lender wants to make sure that its loan will be fully repaid. The deed of trust requires that the borrower maintain adequate insurance, and further provides that if such insurance is not in place, the lender has the right to obtain its own policy at the expense of the homeowner. This insurance is expensive, and homeowners are advised to make absolutely sure that they keep their policy current.

  The deed of trust also deals with the disposition of any insurance proceeds. Generally, the lender will hold those proceeds so that they may be used to restore the property. However, deeds of trust also contain the following language:

  If the restoration of repair is not economically feasible or Lender's security would be lessened, the insurance proceeds shall be applied to the sums secured by this Security Instrument, whether or not then due, with the excess, if any, paid to Borrower.

  In other words, the Lender reserves the right to determine whether to allow the insurance proceeds to be used to restore the property or to pay down (or off) the existing loan.

• Default provisions: Legitimate lenders do not want to foreclose on your property. They make their money by giving you the mortgage loan, and expect that you will repay that loan no later than its due date. However, there may come a time when the lender will have to foreclose. The deed of trust spells out numerous situations which would permit such action on the part of the lender. In legal terms, this is called a "default."

  Defaults come in many sizes and shapes. The most obvious is where the borrower is not making the monthly mortgage payments. However, there are many other situations which give rise to a default. For example:

  1. The borrower has given false, misleading or inaccurate information to the lender during the loan application process, or

  2. The borrower abandons the property, or lets it go to waste.

• Remedies on default: If the event the borrower is in default, the deed of trust spells out the remedies available to the lender. Generally, the lender must give reasonable, written notice of default to the borrower, and give him an opportunity to cure that default.

  But the default is not cured, the lender has two choices: (1) it can sue in a court of law on the promissory note which the borrower also signed at settlement, or (2) it can foreclose on the property.

  The deed of trust spells out the specific procedures relating to the foreclosure process. Keep in mind, that with a deed of trust, the trustees named in that document have the power to sell your property. This right has been confirmed in courts throughout this country, although the law of foreclosure is not uniform throughout the United States. You have to discuss your specific situation with your own attorney in the event you are in default on your mortgage loan.

Books have been written about deeds of trust, and there are literally thousands of court opinions interpreting the language of these documents. What is important is that you fully understand all of those legal documents you are required to sign, and get copies of all of your documents before leaving the settlement office.