What Is a Deed of Trust And How Does It Work

If you’re in the market for real estate, you’ve probably come across the term “deed of trust.” Depending on the lender and the state in which you live, a deed of trust may be required when financing a property purchase. 

How does a deed of trust work? How is it different from a mortgage? If you are asking yourself these questions, we have listed here everything that you need to know about this type of contract.

What Is A Deed Of Trust?

A deed of trust, also referred to as a trust deed is a legal document executed at the closing of a property. It is used instead of a mortgage to secure a real estate transaction in some states.

The buyer and the lender enter into this agreement, stating that the buyer will repay the loan. Until the loan is fully repaid, the legal title to the property is held by a third party, known as a trustee.

A deed of trust serves as collateral for a loan and is registered in the public record. To obtain a home loan in some states, a borrower must sign a trust deed, just as they must sign a mortgage.

How A Deed Of Trust Works

A deed of trust exists to provide lending services, like Rocket Mortgage, with some means of recourse if you do not repay your loan. A deed of trust involves three parties: the trustor, the beneficiary, and the trustee.

Trustor

This is the individual whose assets are kept in the trust. The trustee retains legal title to your house until the loan is paid off. Nonetheless, you retain equitable ownership as long as you continue to repay the loan in accordance with the terms specified in the deed of trust. Even if the formal title is not yours, you have all the benefits of actual ownership, such as the ability to live there and build equity.

Beneficiary

The beneficiary refers to the person or entity whose investment interests are being protected. In most cases, that’s the lender, but it might also be someone you’ve entered into a formal contract with.

Trustee

While you’re paying loan payments, the trustee maintains the legal ownership of the property. Trustee is frequently, but not always, a title company. The trustee’s responsibility is to dissolve and transfer the legal title after your debt has been fully paid off.

If the borrower sells the property before it is completely paid off, the trustee will use the sales revenue to pay the outstanding sum to the lender. If the borrower defaults, the trustee will be in charge of selling the home if it goes into foreclosure.

What Is Included in a Deed of Trust?

A deed of trust contains a lot of critical information regarding your property, your loan, and the terms and circumstances associated with it. A deed of trust often includes the following:

• The amount of money being loaned.
• The loan’s start and maturity dates.
• The legal description of the property.
• Additional information about the property.
• Parties involved in the deal.
• The specific terms, conditions, and obligations, as agreed upon by the parties.
• The amount of late fees that will be imposed if payments are not paid on time, as well as rules regarding when they should be applied.
• A description of what steps will be taken if the loan terms are not satisfied, also known as the “power of sale” clause.
• An acceleration or alienation clause, which is a condition that empowers the lender to demand immediate payment in full if specified events occur.
• If applicable, the prepayment penalty.
• There may also be terms for adjustable-rate mortgages (ARMs).

As mentioned above, the acceleration clause sets the conditions for if you fall behind on your loan payments, which is a demand for urgent payback. Depending on the terms, it can happen after just one missed payment. However, lenders frequently offer borrowers a few months of leniency to make up on payments. 

A condition known as an alienation clause or due-on-sale clause restricts the buyer of the property from taking on the loan at its present terms. Instead, the alienation clause requires that the debt be paid in full if the property is sold.

Depending on your state’s laws, a power of sale clause may be included in the deed of trust. If your lender had to go through the state courts in a judicial foreclosure, the process would take substantially longer. However, you will not be foreclosed upon overnight under a power of sale agreement. Depending on the state and lender, the specifics of the process may vary. 

What Is the Power of Sale Clause?

Most trust deeds include a provision granting the trustee the right to sell. This section explains how the lender can seize the property if the borrower fails to make mortgage payments, a situation known as defaulting on a loan. The foreclosure process is handled by the trustee, who is in charge of selling the property. 

With the power of sale provisions, lenders can foreclose on properties without going through the court system. Because of this, deeds of trust and nonjudicial foreclosure often go hand-in-hand. This sort of foreclosure is typically completed considerably faster than a judicial foreclosure. 

However, this doesn’t imply that you’ll lose your house right away if you miss a payment. Although, it does indicate that the period between receiving notice and selling your property will be substantially shorter. 

Note that each state that allows deeds of trust has its own set of rules. It implies that timetables and notice procedures may vary based on the property’s location. 

Obligations Under a Deed of Trust

As stated in the agreement, a borrower is obligated to pay according to the payment schedule stated in the promissory notes. A lender must accept those payments and appropriately record the unpaid balance. 

The role of a trustee is to be objective and unbiased. Suppose the borrower does not make their loan payments. In that case, the trustee must sell the property to recover as much of the unpaid debt as possible. It is the trustee’s duty to operate fairly and efficiently, ethically, and in the beneficiary’s best interests to ensure that they are paid in full.

Deed Of Trust Vs. Mortgage

While a deed of trust and a mortgage both accomplish the same purpose, there are several critical distinctions between the two forms of legal documents.

Foreclosure type

The sort of foreclosure that an owner will face is determined by whether the owner holds a deed of trust or a mortgage. A person with a trust deed often faces a nonjudicial foreclosure. In contrast, a mortgage involves the lender to go through the court system.

Expense and length of the foreclosure process

Foreclosure on a mortgage involves an expensive and time-consuming process since the lender must go through court. As a result, in jurisdictions that permit them, a mortgage lender typically prefers trust deeds. When a deed of trust is used instead of a mortgage, a lender will often spend less time and pay less to retrieve the  property.

Parties involved

In a mortgage agreement, only the borrower and the lender are involved. With a deed of trust, a trustee is engaged in addition to the borrower and lender.

Additionally, the following are similarities between the two:

Both agreements are distinct from loans

Neither of these documents constitutes the actual loan arrangement. A deed of trust or mortgage is a legal document that binds you to a financial obligation and specifies how your lender may reclaim your property in the case of a default.

Both agreements allow for foreclosure

Both a deed of trust and a mortgage provides a lender the option of foreclosing on a property. These agreements essentially stipulate that if the borrower fails to adhere to the loan conditions, the lender has the option of foreclosing on the property.

State law dictates both types of agreements

State law governs both mortgages and foreclosure documents. The sort of contract a lender must employ depends on the state’s laws where the loan is being made.

What Is A Promissory Note Used For?

A promissory note is frequently required as part of a deed of trust. However, it is a unique document type. Promissory notes work as a guarantee from the borrower that they will honor the loan terms.

The borrower signs the promissory note in favor of the lender. The loan details are spelled out in this document, including the due dates for payments and the interest rate. Even though it is a separate document, a trust deed or a mortgage can be legally regarded as a promissory note.

The lender keeps the note during the length of the loan, and the borrower retains just a copy. It will be stamped “paid in full,” and the lender will execute a reconveyance deed attesting to the fulfillment of the loan agreement.  

What Responsibilities Does the Trustee Have?

The trustee has the authority to take legal action on behalf of the lender if the borrower fails to meet their obligations. These requirements will be outlined and controlled by state law in the deed of trust. Moreover, the trustee can appoint another trustee to manage the foreclosure process in their place.

All legal requirements must be observed whether the original or a substitute is acting as trustee. In the event that a borrower defaults, the trustee must perform the following actions:

• Filing or sending notices to include in public records.
• Posting of notices in official publications for a certain amount of time in accordance with state legislation.
• Completing any additional tasks outlined by state legislation.

When these conditions are satisfied, the trustee has the right and obligation to sell the property at a trustee’s sale without undergoing a formal judicial foreclosure procedure. After the sale, the trustee must then divide the proceeds. The lender gets the proceeds up to the unpaid loan amount, and the buyer receives the remaining funds.

Any sale made by a trustee must be impartial, benefitting neither the trustor nor the trustee. Also, the sales made by the trustee are final and irrevocable.

Prior to the trustee’s sale, the buyer still has some rights during the foreclosure process. After the trustee files a notice, the borrower has a certain amount of time to recover the property by paying all outstanding dues. Depending on the state, the power of sale provision period might range from two weeks to four months or more.

Can You Use a Deed of Trust Anywhere?

Mortgages or deeds of trust fall under the scope of law where the property is located, so it is allowed in certain states but not in others. Only a few states accept both types of contracts. Security deeds are used in some states, instead of mortgages or deeds of trust, to offer lenders a security interest in the property during loan transactions.

Given that state regulation differs, it is always vital to consult an attorney or law firm to explore legal choices and your state’s requirements. They will also assist you in creating and using a legally binding agreement that protects you in your real estate transaction.

What Should You Do Before Signing A Deed Of Trust?

Understand the deed of trust you’re about to sign before you do so. Under the terms of the agreement, you should be aware of your responsibilities and the rights of the trustee. In addition, it’s a good idea to double-check if:

• The spelling of your name is correct.
• The principal amount borrowed and the monthly payment amounts are correct.
• The interest rate is set according to the terms of your agreement.
• You are aware of any prepayment penalty conditions.

When you are ready to sign a deed of trust, you must do so before a notary public. It proves that the signatures of the parties involved are genuine. The trust deed must then be recorded in the state in which it is located and each party should retain a copy of the recorded document.

Understanding what a deed of trust is and how it works is critical for everyone involved in a transaction.

Getting a Deed of Trust

To get a Deed of Trust, you must submit the required documentation to the appropriate court. This paperwork must be filed with the clerk or recorder in the state where the property is located. After the property sale, the lender will typically deliver them to the recording office.

The original Deed of Trust will be sent to the beneficiary, and a copy will be sent to the borrower. Most clerks and recorder offices will make a copy of this document available for you for a nominal search and printing cost. Alternatively, if you want copies of a Deed of Trust, mortgage lenders will have these on hand.

The Bottom Line

Purchasing a real property is a big decision, so it’s essential to do your research and arm yourself with as much information as possible before making an offer. Also, talk to a law firm or real estate agent to learn more about what to expect when investing in real estate. Without question, if you understand how the homebuying process works, you will make an informed decision.

Now that you’ve learned about deeds of trust and how it works, it’s time to secure a loan and buy a property. If something is unclear to you or you want our assistance, do not hesitate to contact us. We’re here to make the process of purchasing a house as simple as possible for you.

Steph Wilkinson

In her 25-year career, Steph Wilkinson has been involved in the acquisition, marketing and sales of over $3 Billion dollars of residential real estate. A number of years ago, Steph transitioned into Brokerage Leadership for National real estate brands and tech start-ups. She has served as a Business Strategist for real estate agents and brokerages alike and is also a real estate coach and trainer. In her new role with the Iconic Team, Steph will be responsible for the growth of the team and will be working with all of our agents to increase their productivity and bottom line.