A deed of trust is a type of security for a loan. It names a third party called the trustee to hold the legal title until you pay it off. In many states, you can either have a deed of trust or a mortgage, but not both.
Learn how a deed of trust works and how it is different from a mortgage.
What Is a Deed of Trust?
A deed of trust acts as an agreement between you—the homebuyer—and your lender. It states not just that you'll repay the loan, but that a third party called the trustee will hold legal title to the property until you do.
A deed of trust is the security for your loan, and it's recorded in the public records. If a state requires it, borrowers must agree to sign the deed of trust if they want to take out a home loan, just as they would have to sign a mortgage in another state.
How Does a Deed of Trust Work?
A deed of trust addresses three parties:
- The trustor, or obligor, who is the borrower
- The trustee, who holds "bare or legal" title (usually a title company)
- The beneficiary, who is the lender
The trustee doesn't represent either the borrower or the lender. The trustee is typically an entity such as a title company that holds "power of sale" in the event that the borrower defaults. Once the deed is paid in full, the trustee reconveys the property to the buyer.
A deed of trust includes most of the same information as a mortgage, including:
- The original loan amount
- A legal description of the property that's used as security or collateral for the mortgage
- The names of parties: trustee, trustor, and beneficiary
- The inception and maturity dates of the loan
- The provisions and requirements of the mortgage
- Late fees
- Legal procedures in the event of default (a "power of sale" clause)
- Acceleration and alienation clauses that detail when a homeowner is considered delinquent or when they sell the home
- Riders, if any, regarding clauses such as prepayment penalties or the terms of an adjustable-rate mortgage
The trustee can file a notice of default in the event that the borrower doesn't pay according to the promissory note's terms. The trustee can also substitute another trustee to handle the foreclosure itself. This is accomplished by filing a formal Substitution of Trustee in most cases.
Deed of Trust vs. Mortgage
When you take out a loan to purchase a home, you will either sign a mortgage or a deed of trust. These terms may often be used interchangeably, but there are some important distinctions.
|Mortgage||Deed of Trust|
|Used in all states||Used in some states|
|Bank forecloses in the courts||Nonjudicial foreclosure|
|Between borrower and lender||Between borrower, lender, and trustee|
|Lender and borrower both have interest in the property until loan is paid off||Trustee has legal title to the property until loan is repaid|
The trustee has the power to sell the property in the event of default, without a court procedure. This is called nonjudicial foreclosure, and it's a key difference between a deed of trust and a mortgage, in which a bank must go through the court to initiate a foreclosure.
The trustee cannot complete the foreclosure until after a certain amount of time has passed since the notice of default was filed. Some states allow a redemption period, in which the borrower has time to buy back the property after a nonjudicial foreclosure. Others give borrowers the right to mediation before the foreclosure process begins.
Some states don't recognize deeds of trust. Some states allow mortgages or deeds of trust; others allow for both. Consult with a real estate attorney to determine what the legal options and requirements are where you live.
Deed of Trust vs. Promissory Note
The deed of trust documents the terms of the debt, secured by the property. Although it often goes hand-in-hand with a deed of trust, the promissory note is a separate document.
Essentially, a promissory note is a promise to pay, signed by the borrower in favor of the lender. It contains the terms of the loan, such as the interest rate and payment obligations. However, legally, both a mortgage and a deed of trust can be considered a type of promissory note.
The promissory note is marked "paid in full" when the loan is paid off and it's returned to the borrower along with a recorded reconveyance deed. The lender retains the promissory note during the term of the loan. The borrower has only a copy until the loan is paid off.
- A deed of trust is a type of security for a loan that names a third party called the trustee to hold the legal title until you pay it off.
- The trustee is typically an entity such as a title company with "power of sale" in the event that you default on your loan payment.
- In many states, you can either have a deed of trust or a mortgage, but not both.
- Unlike a mortgage, in the event of a default, the trustee has the power to sell the property without a court procedure. This is called nonjudicial foreclosure.