When applying for a mortgage, the paperwork can seem never-ending. One of the pieces that may be relevant in your home closing is a deed of trust. If you’re in the market for a new home, understanding what a deed of trust is and how it works may help you during the home buying process.
What Is A Deed Of Trust?
A deed of trust is an agreement between a home buyer and a lender at the closing of a property. It states that the home buyer will repay the loan and that the mortgage lender will hold the legal title to the property until the loan is fully paid. A deed of trust is a type of secured real estate transaction that some states use instead of mortgages.
There are three parties involved in a deed of trust:
- Trustor – This is the borrower
- Trustee – This is the third party who will hold the legal title
- Beneficiary – This is the lender
A deed of trust must include several pieces of information to be a legally binding document.
These factors include:
- The original loan amount
- A description of the property
- Names for all parties involved
- The inception and maturity date of the loan
- What happens in case of default
- And more, depending on the nature of the sale.
How Does A Deed Of Trust Work?
In exchange for a deed of trust, the borrower gives the lender one or more promissory notes. A promissory note is a document that states a promise to pay the debt and is signed by the borrower. It contains the terms of the loan including information such as the interest rate and other obligations.
Once a loan is completely paid, the promissory note will be marked “paid in full” and the deed will be returned to the buyer. While the buyer is paying off the home, the lender will keep the promissory note, whereas the buyer only gets to keep a copy for their records.
Deed Of Trust Vs. Mortgage
Many homeowners confuse the terms “mortgage” and “deed of trust.” Though mortgages and deeds of trust both serve the same purpose, there are a few distinctions.
There are a few key differences between deeds of trust and mortgages.
Foreclosure type: The type of foreclosure you’ll face depends on whether you have a deed of trust or a mortgage. If you have a deed of trust, you’ll usually face a nonjudicial foreclosure. If you have a mortgage, your lender will need to go through the courts.
Foreclosure length and expense: If you have a mortgage loan, it means that your lender will need to seek a judicial foreclosure to take back your property. This means that mortgages take much more time and money to foreclose on. Therefore, many mortgage lenders will use a deed of trust instead of a mortgage if your state allows it and nonjudicial foreclosures.In this scenario, your lender will almost always spend less time and money reclaiming your property.
The number of parties involved in the foreclosure: Another minor difference between a deed of trust and a mortgage is the number of parties involved with both types of contract. A mortgage involves only two parties: the borrower and the lender. A deed of trust has a borrower, lender and a “trustee.” The trustee is a neutral third party that holds the title to a property until the loan is completely paid off by the borrower. In most cases, the trustee is an escrow company. If you don’t repay your loan, the escrow company’s attorney must begin the foreclosure process.
Some of the similarities between a deed of trust and a mortgage include the following:
Neither is a loan. Neither a mortgage nor a deed of trust is the same thing as a home loan. Your loan is an agreement to pay back a certain amount of money to your lender. A deed of trust or mortgage is a contract that places a lien on your property.
Both provide a way for your lender to take back your home through foreclosure. Deeds of trust and mortgages both serve the same basic purpose. They’re both agreements that say that if you don’t follow the terms of your loan, your lender can put your home into foreclosure. The type of foreclosure may vary, but the mechanism used is still the same.
Both are dictated by state laws. Both deeds of foreclosure and mortgages are subject to state laws. This means that the specific type of contract your lender has to use depends on what’s legal in your state. In some states, only a mortgage is legal. In others, lenders can only use a deed of trust. A few states (like Alabama and Michigan) allow both. If your state allows both types of contracts, it’s up to your lender to choose which type you receive.
A deed of trust is a document that you might see at your home closing instead of a mortgage. Where a mortgage is like a deed of trust, a deed of trust involves more people in the sale of a property and is not executed through the judicial system.
If you have questions about getting a mortgage or about deeds of trust, you can work with Rocket Mortgage® by Quicken Loans®.We have the resources to help you through every step of the home buying process, with a simple way to get approved for a mortgage online.
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