Are Deeds of Trust used and insurable in the State of Alabama?

Question

We've been offered the opportunity to purchase a Seller Financed -Purchase money 1st lien DOT - Deed of Trust securing a promissory Note involving a property in the State of Alabama. We will fund this internally for our fund and take an assignment of the security instrument and endorsement of the promissory Note. There NEVER was a LOAN Title insurance policy issued.

TWO (2) Title companies we've approached have told us that Deeds of Trust are NOT used in the State of Alabama and the commonly used security instrument used to secure "A Promise" promissory Note involving real estate is a MORTGAGE security instrument. They are RELUCTANT to issue a loan title insurance policy insuring the DOT - Deed of Trust and have stated that we may have COLLECT ABILITY issues IF the Note goes BAD in the future and we have enforce our rights as a creditor against the Debtor to collect.

A quick check online using AI - says that "Yes, Alabama is considered both a mortgage and a deed of trust state. This means that when securing a loan with real estate, Alabama allows the use of either a mortgage or a deed of trust, unlike some states that exclusively use one or the other. "

Q- Does anyone have REAL EXPERIENCE with this issue?
Have you used a DOT -Deed of Trust to secure a Promissory note or were
you able to obtain a Lender Title insurance policy insuring the DOT and its assignment to you?

Puzzled for sure.....

Lauren Robins · Answer

Hi Michael!

Yes, this is a nuanced issue that has real-world implications for enforceability and title insurance coverage in Alabama.Alabama is primarily a mortgage state. While it is technically true that Alabama law permits both mortgages and deeds of trust (DOTs) to secure promissory notes, in practice, mortgages are overwhelmingly used and widely recognized by local title companies, courts, and lenders. The statutory foreclosure process and legal precedent in Alabama revolve heavily around mortgage law. As a result, most title companies are unfamiliar or uncomfortable with underwriting title insurance policies that involve a DOT, especially one that has not previously been insured.Title insurance issues are common when DOTs are used in Alabama. In your case, the reluctance of two title companies is not surprising. If the deed of trust was never insured and is not the commonly accepted instrument in the state, then underwriters will flag the transaction as irregular. Even if the DOT is legally valid under Alabama law, title insurers are concerned about practical enforcement: namely, whether a court will uphold the power-of-sale clause in the DOT or whether a judicial foreclosure process would be required. Without a title insurance policy, you are effectively taking on that enforcement risk yourself.Enforceability concerns may be valid. In the event of default, the question becomes whether a non-judicial foreclosure can be carried out under the DOT terms, or if you'd be forced into a judicial foreclosure due to the state’s preference for mortgages. If a court finds the DOT structure to be inconsistent with Alabama norms or improperly executed, it could impair your ability to foreclose efficiently or recover the debt, thereby affecting collectability.Best practice in Alabama is to use a mortgage. If you're acquiring this note and security instrument on the secondary market, you could consider converting the DOT to a mortgage through a reformation agreement or new documentation executed by the borrower, assuming cooperation. This is especially important if you want to obtain title insurance coverage. Some investors even require a new mortgage (not DOT) be executed and recorded concurrently with an assignment or purchase of the note.Summary and recommendation: While Alabama law allows for either instrument, practical real estate finance practice favors mortgages. A DOT may be legally valid but is unlikely to be favored by title companies or courts. Unless you are comfortable assuming the foreclosure and title risk, you should either negotiate to have the security instrument replaced with a mortgage, or get a title company that is willing to issue a lender’s policy insuring the DOT — in writing — before you fund the acquisition. If that’s not possible, this asset may not be appropriate for a fund with fiduciary responsibilities to investors.Note: This information is for educational and informational purposes only and does not constitute legal, tax, financial, or investment advice. No attorney-client, fiduciary, or professional relationship is established through this communication.