The Definition of Deed of Trust
Deeds of trust aren't used in every state
A deed of trust acts as an agreement between you—the homebuyer—and your lender, not just that you'll repay the loan, but that a third party called the trustee will actually hold legal title to the property until such time as you do.
The amount of paperwork that homebuyers must sign at closing is mountainous. It can take them almost an hour to finish without reading everything first. The deed of trust can become just one more piece of paper, but it's the most important piece of paper when it's coupled with the promissory note.
What Is a Deed of Trust?
A deed of trust is the security for your loan, and it's recorded in the public records. A deed of trust can include several pages. Borrowers must agree to sign the deed of trust if they want the loan from that particular bank.
A deed of trust addresses three parties:
- The trustor, who is the borrower
- The trustee, which is the entity or individual who holds "bare or legal" title
- The beneficiary, which is the lender
The deed of trust identifies the following:
- 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 date of the loan
- The provisions of the mortgage and requirements
- Late fees
- Legal procedures in the event of default
- Acceleration and alienation clauses
- Riders, if any, regarding clauses such as prepayment penalties or the terms of an adjustable-rate mortgage
What Is a Trustee?
A deed of trust includes an independent third party—the trustee—who 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.
The trustee also reconveys the property to the buyer once the deed of trust is paid off in full.
The trustee can file a Notice of Default in the event that the borrower doesn't pay according to the promissory note's terms, but the trustee will often substitute another trustee to handle the foreclosure itself. This is accomplished under a Substitution of Trustee in most cases.
The trustee has the power to sell the property on the courthouse steps in the event of default, without a court procedure. It can do so after the Notice of Default has been in the public record for at least 90 days and after a 21-day publication period in a major circulation newspaper.
The borrower can redeem the property by making up the back payments and paying the trustee's fees up to three months after recordation of the Notice of Default. The sale is final, however, when the trustee sells the property at a trustee's sale.
What is a Promissory Note?
The deed of trust is security of the debt, secured by the property, whereas the promissory note is secured by the deed of trust. The promissory note is the evidence of the debt.
It's 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. The promissory note is generally not recorded.
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.
Before Signing a Promissory Note and Deed of Trust
Read both documents, including the pre-printed portions, before you sign a promissory note and a deed of trust. Preparers are human and can make mistakes, so it's important to review certain items:
- The spelling of trustors' names
- The principal balance of the loan
- The interest rate
- The rider if the interest rate is adjustable
- The payment amount
- Prepayment penalties, if any
- The address of the property
Deeds of Trust Aren't Legal in All States
Some states don't recognize deeds of trust. In fact, only slightly more than half do. Most states allow mortgages or deeds of trust, but not both, with the exception of Alabama, Arizona, Arkansas, Illinois, Kentucky, Maryland, Michigan, Montana, and South Dakota. Consult with a real estate attorney if you live in one of these states and it turns out that you have a choice.
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.