What is Deed Of Trust?

When applying for a mortgage, the paperwork can seem never-ending. One of the documents that may be relevant in your home closing is the deed of trust. A deed of trust is used to secure a home loan by transferring the property title to the trustee until the mortgage is paid off.

What’s Included In A Deed Of Trust?

A deed of trust is an agreement between a home buyer and a lender at the closing of real property. The deed of trust, sometimes called a “trust deed,” states that the home buyer will repay the home loan and the mortgage lender will hold the property’s legal title until the loan is paid in full. A deed of trust is a type of secured real estate transaction that some states use instead of mortgages.

Three parties are involved in a deed of trust: the trustor (or the borrower), the trustee (the third party who holds legal title to the property) and the beneficiary (the lender). A deed of trust must include several pieces of information to be a legally binding document. These include:

• The original loan amount
• A description of the property
• Names of all parties involved
• The inception and maturity date of the loan
• Riders, which are addendums that provide more nuanced information about the mortgage or property type
• Fees
• What happens in case of mortgage default
• Additional information 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 home loan, including the interest rate, total loan amount, repayment terms and other loan obligations.

What Happens When A Deed Of Trust Is Paid Off?

Once a loan is completely repaid, 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.

When a deed of trust is paid off, the trustee issues a deed of reconveyance. This legal document transfers the title back to the borrower and releases the lien on the property. You’ll record this document with the county recorder’s office to officially clear the title.

What Happens If You Default On A Deed Of Trust?

Deed Of Trust Vs. Mortgage

Many homeowners confuse the terms “mortgage” and “deed of trust.” Though mortgages and deeds of trust serve the same purpose, there are a few distinctions.

Similarities Between Deeds Of Trust And Mortgages

Some of the similarities between a deed of trust and a mortgage include the following:

Both Allow Foreclosure

Both agreements state that if you don’t follow the loan terms, your lender can put your home into foreclosure. The foreclosure type may vary, but the mechanism is the same.

Both Are Dictated By State Laws

State laws dictate whether a deed of trust or mortgage is used. Some states allow only mortgages, others only deeds of trust and a few (like Alabama and Michigan) allow both. The choice depends on state law and the lender’s preference.

Differences Between Deeds Of Trust And Mortgages

There are a few key differences between deeds of trust and mortgages:

Deeds Of Trust Aren’t Loans

Although a mortgage is considered a type of loan, a deed of trust is not a loan, it’s an agreement.

Foreclosure Type

The type of foreclosure you’ll face depends on whether you have a deed of trust or a mortgage note. If you have a deed of trust, you’ll usually face a nonjudicial foreclosure. A nonjudicial foreclosure takes place without court involvement. If you have a mortgage, your lender will need to go through the courts.

Foreclosure Length And Expense

Judicial foreclosures for mortgages take much more time and money to complete. Lenders may prefer deeds of trust in states allowing nonjudicial foreclosures to save time and money.

Number Of Parties Involved

A mortgage involves only two parties: the borrower and the lender. A deed of trust has a borrower, lender and 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 or title company. If the loan isn’t repaid, the trustee initiates the foreclosure process.

How Do You Find Out If Your State Uses Deeds Of Trust Or Mortgages?

To learn whether your state uses deeds of trust or mortgages, you can check your state’s real estate or property laws, which are often available on government websites. You can also consult with a real estate attorney or contact your local county recorder’s office for more information.

Pros Of Deeds Of Trust

Deeds of trust offer several advantages for borrowers. Here are some key benefits:

• Lower foreclosure costs: The costs associated with nonjudicial foreclosures are generally lower than with judicial foreclosures, which can reduce the financial burden on borrowers.
• Neutral third party: The trustee, as the neutral third party, ensures that the property title is handled fairly until the loan is fully repaid.
• Simplified foreclosure process: The involvement of a trustee can streamline the process and make it easier for borrowers to navigate the foreclosure proceedings.

Cons Of Deeds Of Trust

While there are advantages, deeds of trust also have some drawbacks for borrowers. Here are the main disadvantages:

• Fewer borrower protections: Nonjudicial foreclosures may offer fewer borrower protections compared with judicial foreclosures, which can make it easier for lenders to foreclose on the property without court oversight.
• State restrictions: Not all states permit deeds of trust, which can be confusing for borrowers who move to a new state with a different set of regulations.
• Limited judicial oversight: The lack of court involvement in nonjudicial foreclosures means there’s less opportunity for borrowers to contest the foreclosure or ensure fair treatment through judicial review.

The Bottom Line

A deed of trust is a document that you might see at your home closing instead of a mortgage. While the two are similar, a deed of trust involves more people in the sale of a property and is not executed through the judicial system.