Do you think all home loans involve a mortgage? You might be surprised to find out that a similar document is used in some states. Known as a deed of trust, this document serves the same purpose as a mortgage document but with some critical differences to know before signing.
What Is A Deed Of Trust?
A deed of trust is a method of securing a real estate transaction that includes three parties: a lender, a borrower and an independent third-party trustee. The lender gives the borrower the money to buy the home in exchange for one or more promissory notes, while the trustee holds the legal title to the property until the loan is paid off.
Some states use this method instead of the traditional mortgage process. Although there are some exceptions, states tend to use either a deed of trust or a mortgage and not both options. The states that use a deed of trust are:
- Alaska
- Arizona
- California
- Colorado
- District of Columbia
- Idaho
- Maryland
- Mississippi
- Missouri
- Montana
- Nebraska
- Nevada
- North Carolina
- Oregon
- Tennessee
- Texas
- Utah
- Virginia
- Washington
- West Virginia
Deed Of Trust Vs. Mortgage
While a deed of trust is a legal contract promising that a home buyer will repay the amount borrowed, it differs from a mortgage because it requires a neutral third party to hold the rights to the property until the loan is paid off. A deed of trust is often used when state law requires it or when a traditional lending service (like a bank) is not involved in the transaction.
Whether you have a deed of trust or a mortgage, they both ensure that the borrower repays the loan, either to a lender or an individual person.
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How Does A Deed Of Trust Work?
The deed of trust involves a trustor, a beneficiary and a trustee. The idea of the trust is that it sets up recourse for the lender so that, under conditions defined in the trust, they can have the property sold by the trustee, take it back or compel accelerated payment of the loan in order to protect their investment. In effect, the trust works as security for the promissory note – the borrower’s promise to pay the loan back.
Parties Involved In A Deed Of Trust
- The trustor: the person or entity whose assets are being put into the trust. In the case of a real estate transaction, this is the borrower. While the legal title defines the actual ownership of the property and is held in the trust, as long as the borrower meets the terms and conditions of the trust, the borrower still holds equitable title.
- The beneficiary: the person or entity whose investment interest is being protected. In most cases, this is a lender, but it could also be a person if you have a land contract with an individual to eventually own a property outright. In exchange for lending you the money for the property, the deed of trust serves as the lender’s guarantee that you’ll pay the loan off.
- The trustee: the person or entity that actually holds the legal title while the payments are being made. The trustee is supposed to be impartial and not do anything that unduly benefits either the trustor or the beneficiary.
Factors Included In A Deed Of Trust
- Loan amount: what the lender or other trust beneficiary is giving you so you can buy the house. Typically, this is the agreed-upon purchase price of the home minus the down payment.
- Length of the loan: the time frame in which the loan must be paid off, also referred to as the loan term.
- Loan requirements: certain conditions to give you the loan. One of the most important requirements to know is whether there’s a prepayment penalty and, if so, how long it lasts.
- Property description: a detailed description of the property being bought, including what the trustor has the rights to, assuming they follow all the guidelines in the trust in terms of repayment of the loan.
- Power of sale clause: defines the circumstances under which a trustee can sell the property for the beneficiary. Typically, this comes into play only if you default on the mortgage.
- Acceleration and alienation clauses: Acceleration clauses and alienation clauses require borrowers to pay back the full amount of the loan but are triggered for different reasons. Acceleration clauses generally take effect after a borrower is delinquent or behind on their payments. Alienation clauses require the borrower to pay back the loan in full before the transfer of the property.
Deed Of Trust FAQs
Below are some of the most common questions about deeds of trust.
Who is the trustee in a deed of trust?
While some states may have laws determining who can be a trustee, they’re usually title insurance and/or escrow company. A real estate attorney may also serve as a trustee. The lender will typically choose the trustee.
How long does a deed of trust last?
Like a mortgage, a deed of trust will have a timeline defining when the loan must be paid back in full. These timelines are traditionally 15 or 30 years in real estate.
Can a deed of trust be transferred?
Yes. Just like a mortgage, a deed of trust can be transferred on the secondary market to another lender. In real estate, this is known as assignment.
What is a warranty deed vs. a deed of trust?
Both a warranty deed and a deed of trust are used to transfer title in a real estate transaction but are used with different protections in mind. A warranty deed ensures that the previous owner of the home had clear title to the property, giving the buyer peace of mind that they won’t have to deal with any prior liens or title issues that could threaten their home ownership. A deed of trust protects the lender from the possibility that the buyer will not repay the loan.
Is a deed of trust the same as a title?
No. A home’s title is the history of transactions involving the property that is used to ensure who actually owns the property. A deed of trust documents the terms of a specific loan agreement. Once the deed of trust is completed and signed by all parties and recorded with the local government, it becomes part of the house’s title.
The Bottom Line
A deed of trust is a common method of securing a real estate transaction that is used instead of a mortgage document in many states. Instead of just two parties, as with a mortgage, a deed of trust involves three parties, the trustor, beneficiary and trustee. While there are some key differences between the two, the homeowner is still responsible for making their mortgage payment every month until their balance has been paid in full.
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Patrick Russo
Patrick is a writer and researcher with expertise in real estate and insurance. When he is not writing, you can find him hanging out with his family and friends or walking around Washington, D.C., listening to an audiobook.
