In some states, a deed of trust is used in place of a mortgage, and is an agreement between three parties: a lender, a borrower, and a trustee. Essentially, the lender puts up a piece of property that the borrower wants to buy, while the trustee holds onto the title until it is paid off.
The process is fairly straightforward, and works like this: The borrower gives the lender a promissory note, which is a commitment to pay off the debt. The lender then transfers his title to the property to a third party, the trustee. While paying off the debt, the borrower keeps the actual title to the property, but the trustee holds the legal title to the property until the debt is satisfied.
There are advantages and disadvantages associated with deeds of trust, and these can depend on the viewpoints of each party.
In case of foreclosure, deeds of trust keep the process out of court. Non-judicial foreclosures are usually much faster than judicial foreclosures. If the borrower defaults, the trustee can foreclose on the property, by way of the power of sale clause. If the lender so chooses, he may then bid on the property to regain ownership. A few more advantages involving deeds of trust include:
- In some situations, all parties may receive proceeds from the sale.
- Terms of sale between the parties may be pre-negotiated in the contract.
- Foreclosure parameters are less strict in comparison to judicial foreclosure.
In recent years, deeds of trust have become less common than they once were. Some states still use them, whereas other states only recognize mortgages. As of August 2017, the following states do not use or allow the use of a deed of trust:
- New Jersey
- North Dakota
- South Carolina
But be sure to check the laws in your jurisdiction before considering either. Deeds of trust and mortgages have similarities, but the difference lies in how each deals with foreclosure.
If a power of sale provision exists in a deed of trust, and the borrower defaults on the debt, the lender can then foreclose, which allows the trustee to sell the property. For example, if the trustee sells the house that the borrower had been paying off, the borrower loses the home in which he was living and dreamed of owning. The lender also loses the property, but will receive due proceeds from the sale. The borrower may also receive funds in excess of what is owed the lender after the sale is final.
This whole process takes place out of court, and can be very quick. Since there is no judicial oversight in a deed of trust, the potential for disputes over title ownership increases, especially since the rules are a little more lax.
If you are considering becoming involved in a real estate deal, it is best to fully understand your rights and your options before proceeding further. A deed of trust may be a good option for you, and an experienced real estate attorney can help you decide your best plan of action to protect your future interests.