A deed of trust is a specific type of secured real estate transaction that is sometimes used instead of a mortgage. It is an agreement between a home buyer and a lender which occurs at the closing of a property. This agreement states that the home buyer will repay the loan and in exchange, the mortgage lender will hold the legal title to the property until the loan has been paid.
There are three parties that are involved in a deed of trust transaction:
- The trustor, or borrower;
- The trustee, or, the third party who will hold the legal title; and
- The beneficiary, or the lender.
The process is relatively straightforward in that the borrower provides the lender with a promissory note, which is a document that states a promise to pay the debt and is signed by the borrower. A promissory note contains the terms of the loan, including information such as the interest rate and other obligations.
The lender then transfers their title to the property to a third party, or, the trustee. While paying off the debt, the borrower possesses the physical title to the property while the trustee holds the legal title to the property. This would be until the debt has been satisfied.
To reiterate, a deed of trust must include several pieces of information in order to be a legally binding document. Examples of such information include,but may not be limited to:
- The original loan amount;
- A detailed and accurate description of the property;
- The names of all parties involved in the transaction;
- Both the inception and maturity date of the loan;
- Consequences of default; and
Once a loan has been completely paid, the promissory note will be marked “paid in full.” Additionally, the deed will be returned to the buyer. While the buyer is paying off the home, the lender will keep the promissory note, whereas the buyer only keeps a copy for their records.
How Is A Deed Of Trust Different From A Mortgage?
Although mortgages and deeds of trust essentially serve the same purpose, there are a few differences between the two concepts.
The first difference would be foreclosure type, in cases involving foreclosure. The type of foreclosure that you will face largely depends on whether you have a deed of trust, or a mortgage. If you have a deed of trust, you will generally go through a nonjudicial foreclosure process. However, if you have a mortgage, your lender must go through the courts.
Additionally, if you have a mortgage loan, your lender will need to seek a judicial foreclosure in order to take back your property. What this means is that mortgages take considerably more time and money to foreclose on. Because of this, many mortgage lenders will use a deed of trust instead of a mortgage when allowed by the state.
Another difference would be the number of parties that will be involved in the foreclosure This is a minor difference, but a difference nonetheless. A mortgage involves the borrower and the lender. As previously mentioned, a deed of trust involves a borrower, lender, and a trustee. The trustee is a neutral third party that holds the title to the property until the borrower completely pays off the loan. Generally speaking, the trustee is an escrow company; if you do not repay your loan, the escrow company’s attorney must begin the foreclosure process.
In terms of the similarities between a deed of trust and a mortgage, neither is a home loan. Your loan is an agreement to pay back a specific amount of money to your lender, whereas a deed of trust or mortgage is a contract which places a lien on your property.
Both ways allow for your lender to take back your home through foreclosure, as they are both agreements stating that if you do not follow the terms of your loan, your lender can put your home into foreclosure.
Additionally, both are dictated by state laws, meaning that the specific type of contract your lender must use depends on what is legal in your state. In some states, only mortgages are legal, while other states have determined that lenders may only use a deed of trust. There are a few states, such as Alabama and Michigan, which allow both.
Why Would I Consider Getting A Deed Of Trust? Why Would I Not Consider Getting A Deed Of Trust?
To summarize what was discussed above, in case of foreclosure, deeds of trust keep the process out of the court. Generally speaking, non-judicial foreclosures are much faster than judicial foreclosures. Additionally, if the borrower defaults, the trustee can foreclose on the property through the power of sale clause. If the lender chooses to do so, they may then bid on the property in order to regain ownership.
Some other examples of advantages involving deeds of trust include, but may not be limited to:
- Under specific circumstances, all parties involved may receive proceeds from the sale;
- The terms of sale between the parties may be pre-negotiated in the contract; and
- Foreclosure parameters are generally less strict when compared to judicial foreclosure.
Recently, deeds of trust have become less common than in the past. As previously mentioned, some states still use them while other states only recognize mortgages. As of October 2021, the following states allow for both mortgage and deed of trust:
- Montana; and
- South Dakota.
The following are mortgage only states:
- New Jersey;
- New York;
- North Dakota;
- South Carolina;
- Vermont; and
The following are deed of trust only states:
- New Hampshire;
- New Mexico;
- North Carolina;
- Rhode Island;
- West Virginia; and
If a power of sale provision exists in a deed of trust, and the borrower defaults on the debt, the lender can then foreclose on the property. As previously mentioned, this allows the trustee to sell the property. An example of this would be how if the trustee sells the house that the borrower had been paying off, the borrower loses the home in which they were living and intended to own. The lender also loses the property, but will receive due proceeds from the sale. The borrower could also receive funds in excess of what is owed to the lender after the sale is final.
The entirety of this process takes place out of court, and can be completed considerably quickly. However, because there is no judicial oversight in a deed of trust, the potential for disputes over title ownership increases. This is especially when considering that the rules are less strict.
Do I Need An Attorney For Issues Associated With A Deed Of Trust?
If you are involved in a deed of trust transaction, or are experiencing issues associated with such a transaction, you will need to consult with an experienced and local mortgage lawyer. An attorney will be aware of your state’s laws concerning the matter, and what your rights and legal options are under those laws.
Additionally, your mortgage attorney will also be able to represent you in court, as needed, should any legal disputes arise.