Deed of Trust: What it Means in Property Ownership

When you prepare to purchase a home, you'll usually find an avalanche of paperwork you must complete. A deed of trust is one document you should not sign without understanding its implications. In a standard mortgage agreement, you will have sole responsibility for the property, and you and the mortgage lender will have an interest in a favorable loan repayment. With a deed of trust, a neutral third party will also be involved. 

Depending on your lender and state, you might be required to fill out a deed of trust, which can have long-term implications for your property ownership if you fall behind on mortgage payments. Read on to understand what a deed of trust is and how it differs from a standard mortgage. 

What Is a Deed of Trust?

A deed of trust is a legal document that outlines the terms and conditions of a loan secured by real estate. Some states use a deed trust instead of a mortgage as a secured real estate transaction. 

The deed trust agreement between the homebuyer and the lender, signed at closing, states that the homebuyer will repay the loan, and the mortgage lender will hold the property's legal title until the loan is paid in full. 

A deed of trust is an agreement between a homebuyer and a lender signed at the closing of a property. The agreement states that the homebuyer will repay the home loan, and the mortgage lender will hold the property’s legal title until the loan is paid in full. In most cases, a neutral third party will hold the legal property title until the loan is repaid, although this may vary by state or lenders.

How Does a Deed of Trust Work?

Three parties are involved in the deed of trust: the trustor, trustee and beneficiary. Here's how each one fits into the lending process.

• Trustor: The trustor is the borrower who will benefit from the loan. The trust holds the title to your home until the loan is paid off, but you (the borrower) remain the equitable owner as long as you pay the loan according to the terms in the deed of trust. 
• Trustee: The trustee is a neutral third party who holds the legal title to the property. Trustees often are title companies. Once the loan is paid off, the trustee is responsible for dissolving the trust and transferring the title to the homeowner.
• Beneficiary: The beneficiary is the lender. The lender is called the beneficiary because their investment interest is protected through the deed of trust. 

What Information Is Needed in a Deed of Trust?

To be legally binding, a deed of trust must outline other key information, such as:

• A description of the property
• The original loan amount
• Names for all parties involved (trustor, trustee and beneficiary)
• Inception and maturity date of the loan
• Fees
• Procedure or actions in case of mortgage default
• Various clauses, such as acceleration and alienation clauses
• Riders regarding the clauses outlined
• Additional information, depending on the nature of the sale

One unique feature of a deed of trust is an acceleration clause triggered from as little as one missed payment. In case of such a clause, you may be required to repay the full loan amount. However, many lenders allow borrowers to catch up on payments. If the borrower fails to meet the terms outlined in the acceleration clause, formal foreclosure proceedings can begin.

What Are the Pros of Using a Trust Deed?

A deed of trust offers additional security and a practical solution for both borrowers and lenders. For borrowers, a deed of trust can help secure a loan with more favorable terms. Lenders benefit from a quicker and less costly foreclosure process than a traditional mortgage. 

Pros of using a deed of trust include:

• Secure a loan with better terms
• Offers assurance to both lender and borrower
• Adds a dedicated third party to your planning
• Faster, less complex foreclosure (for lenders) in case of default

What Are the Cons of Using a Trust Deed?

The cons of a trust deed are mostly for the borrower, as the deed of trust, by nature, protects the lender's interest. For a borrower to secure a deed of trust, they must release equity in the home. In addition, the deed of trust is relatively inflexible, with a greater risk of foreclosure. 

What Happens to the Deed of Trust After the Loan Is Paid Off?

Once the loan is fully satisfied, the lender releases the deed of trust. This release is recorded with the county recorder's office to clear the property's title. Usually, it is the trustee who holds and then releases the deed of trust, recording the title as free and clear.

Deed of Trust vs. Mortgage: Similarities and Differences

A deed of trust is a unique legal agreement, distinct from a mortgage. However, there are similarities between a deed of trust and a mortgage, along with key differences that are important to understand. 

Similarities 

• Facilitate home buying: Both a mortgage and a deed of trust allow individuals to borrow the funds required to purchase a home.
• Subject to state law: Both are governed by state laws and must meet all requirements.
• Contracts: Neither a mortgage nor a deed of trust is the actual loan agreement. Instead, they are contracts that place a lien on your property and state how the lender can repossess a property through foreclosure.
• Public record: Both documents are recorded with the county clerk.

Differences 

• Number of parties: A mortgage is an agreement between two parties, while a deed of trust involves three parties.
• Foreclosure sale proceedings: A mortgage requires judicial foreclosure, while a deed of trust does not.
• Foreclosure timeline: Nonjudicial foreclosure through a deed of trust is much faster than judicial foreclosure required in a mortgage.
• Lender and borrower protections: While both parties are protected with both documents, a deed of trust favors lender protections while the borrower takes on additional risk. 

What Is the Difference Between a Deed of Trust and a Warranty Deed?

A warranty deed and a deed of trust have entirely different roles in real estate transactions. A warranty deed confirms that the property is owned by the seller and can be sold without any encumbrances. A deed of trust is an agreement in place of a mortgage, used in certain states, that represents a buyer’s guarantee to repay the property loan as scheduled with the lender.

Purchasing a Home with a Deed of Trust

In many states, a deed of trust is required by law to purchase a home with a loan. A deed of trust is designed to protect both the borrower and the lender. In that case, you can still research and compare mortgage lenders to get the best available terms. If in doubt, have a trusted real estate attorney look over and explain the agreement before signing anything. If you're ready to buy your next home, consider the complete guide to real estate investing or find the best mortgage lenders online here. 

Frequently Asked Questions