What Is a Deed of Trust?
A deed of trust or a “trust deed” is a legal document that serves as security for some real estate loans. It denotes an agreement between the borrower of a real estate loan and the lender that a third party will take over the legal ownership of the property in question and act as trustee until the loan is repaid as per the agreed terms. During the repayment period, the borrower is fully responsible for the property and keeps the property’s equitable or actual title unless the deed of trust explicitly states otherwise. Conversely, the trustee keeps the property’s legal title.
How Is a Deed of Trust Different from a Mortgage or a Promissory Note?
The difference between a deed of trust and a deed of mortgage is that the latter is an agreement between two parties (a mortgagee/lender and a mortgagor/borrower), whereas the former includes three parties, namely a lender/beneficiary, a borrower/trustor, and the trustee. If a borrower fails to meet the terms of repayment at the lender’s request, a trustee will initiate and execute the foreclosure process.
Trust deeds and promissory notes are used together. The trust deed serves as the security for the real estate loan, and it’s secured by the property that was financed by the loan. A promissory note specifies the payment terms and amounts, the interest rate, and the borrower’s promise to pay the borrowed amount plus interest. The lender holds the promissory note until the borrower has fully paid the loan.
Who Are the Parties to a Deed of Trust?
- Trustor – The borrower.
- Lender – The entity or individual that puts up the capital for the real estate transaction.
- Trustee – An independent party that keeps the legal title of the property.
In some cases, there could be a fourth party, a guarantor, who provides an extra avenue for the lender to be paid in case the borrower defaults.
What are the Trustee’s Rights Under a Deed of Trust?
The trustee can sell the real estate if the borrower fails to meet their obligations as per the agreement. Once the buyer has fully paid the loan, the trustee reconveys/transfers the property’s legal title to the buyer.
When Should a Deed of Trust Be Used?
Some states (“mortgage states”) don’t allow for the use of trust deeds. Conversely, some states require the use of trust deeds whenever a buyer is using borrowed funds to finance real estate purchases.
What Information Should Be Included in a Deed of Trust?
The typical components of a deed of trust include:
- Loan amount
- Description of real estate being used as collateral or security
- Names of parties
- The loan’s start and maturity dates
- The mortgage’s requirements and provisions
- Late fees
- Legal procedures in case of default
- Alienation and acceleration clauses specify when a borrower is to be considered delinquent and when to sell the property.
- Any riders regarding clauses like adjustable-rate mortgage terms and prepayment penalties.
What You Should Do Before Signing a Deed of Trust
Ensure you understand the document in its entirety before you sign. You should also verify your name, principal and repayment amounts, interest rate, and prepayment penalty provisions.