A Deed of Trust is an agreement between a borrower, a lender and a third-party person who’s appointed as a Trustee. It’s used to secure real estate transactions where money needs to be borrowed in order for property to be purchased. A Deed of Trust can be thought of similarly to a mortgage, and some states use them instead of traditional mortgages.
Here we’re discussing everything there is to know about Deeds of Trust, so you can be confident in your knowledge should you ever use one. Read on to gain a full understanding of what a Deed of Trust is, how and when to use one, how it actually compares to a mortgage and more.
What Is a Deed of Trust?
A Deed of Trust is a legal document similar to a home mortgage. It guarantees a real estate transaction between a lender and a borrower. A Deed of Trust definition is most easily expressed as an agreement between a borrower, a lender and a third party known as the Trustee.
Deeds of Trust work in a simple manner: a lender gives money to a borrower for a home purchase. In exchange, the lender receives a promissory note that guarantees the borrower will repay the loan amount. A Trustee holds the title during the loan period.
Why Do You Need a Deed of Trust?
A Deed of Trust can be an alternative in states that don’t use mortgages. It can also be used when a traditional bank or lender isn’t providing the money for the loan. Regardless of whether you have a mortgage, or a Deed of Trust, both are tools that guarantee a loan will be repaid to the person or lender you borrowed from.
Who Are the Parties in a Deed of Trust Transaction?
Deeds of Trust transactions will always involve three parties - there will be:
The Beneficiary (lender)
The Trustor (borrower)
The Third Party Trustee (holds the legal title, often a title company)
The Beneficiary of a Deed of Trust is the Lender, and the Deed serves to protect their investment.
The Trustor is the borrower. While the legal title on the property is put into a Trust, as long as timely and consistent payments are made, the borrower has equitable title. This means borrowers can live and gain equity in the property even while they make payments on the loan.
The Trustee’s role is to hold the legal title on the property for as long as the borrower is making those payments. While serving as Trustee, they must remain impartial and not do anything to benefit either the Trustor or the Beneficiary.
Deed of Trust vs Mortgage - How Do They Differ?
Deeds of Trust differ from mortgages in a few different ways. While both are a guarantee that a borrower repay a loan, mortgages only have two parties (the lender and the borrower). Deeds of Trust, as we’ve seen, have the additional Trustee party.
A primary difference between a mortgage and a Deed of Trust is how defaults on payments would be handled. In a traditional mortgage, if a borrower fails to make the promised payments on their loan, the lender would be responsible for initiating the process of foreclosing on the property. That process would be handled in court. By contrast, Deeds of Trust go through a process known as Nonjudicial foreclosure.
Other differences include:
Mortgages are used in all states
Deeds of Trust are only available in certain states
Mortgages offer both the borrower and the lender equal interest in the property until the loan is completely paid off
Deeds of Trust give the legal title on the property to the Trustee
While Deeds of Trust and Promissory Notes are related, a Promissory Note is a separate document that’s essentially a “promise” to pay the loan back. Promissory Notes are signed by the borrower, and they contain the details and terms of the loan, like payment schedules, interest rates and payment obligations. Legally, both a Deed of Trust and a mortgage can be considered specific types of promissory notes.
Other Common Questions About Deeds of Trust
Despite being similar to the more well-known mortgage, many people often have questions about Deeds of Trust. Read on, as we explore some of the more common questions borrowers tend to have about this type of loan option.
Who is the Trustee in a Deed of Trust?
The Trustee in a Deed of Trust is the party who holds legal title to the property during the life of the loan. Trustees will most often have one of two jobs.
If the property is sold before the loan is paid off, the Trustee will use the proceeds from the sale to pay the lender any outstanding portion of the loan. The borrower is then paid any remaining proceeds.
If the loan is completely paid off (either before or at the end of the loan term), the Trustee is responsible for dissolving the Trust and transferring the legal title over to the new owner (the borrower).
Is a Deed of Trust the Same as a Title?
Deed of Trust and Title are both terms you’ll likely hear when purchasing property, but they actually are different in purpose and meaning. A Deed of Trust is the loan on the property, and a Title expresses the actual ownership of a property.
Can You Sell a House with a Deed of Trust?
Yes, you can sell a home with a Deed of Trust. However, just like a mortgage, if you’re selling the home for less than you owe on it, you’ll need approval from the lender.
When you close a deal with a Deed of Trust, there are three main documents that are important to note (however there are actually a number of other documents that’ll be signed as part of the process, too). The three biggest to keep in mind are:
The Deed of Trust
The Promissory Note
Just like with a mortgage, funds from the sale of the house will be used to pay off the beneficiary (the lender), and any remaining proceeds will go to the borrower. The Trustee is responsible for ensuring the money is appropriately dispersed. And as we noted earlier, the Trustee is also responsible for dissolving the Trust as the final part of the process.
How Long Does a Deed of Trust Last?
A Deed of Trust will, just like a mortgage, have a maturity date that notes when a loan will be paid off in full. As long as the borrower makes scheduled payments per the agreement, the loan will be repaid, and the borrower will be the new legal owner who holds the title.
How to Title a Property in a Trust
Whether you’re using a Deed of Trust or a mortgage to buy a home, the process can seem a bit overwhelming at times. Arming yourself with a clear understanding of how everything works is essential. It means you can feel confident in navigating the process, ultimately greatly reducing any potential stress. So what happens after you’re a homeowner? You may want to consider holding the property inside a Trust.
Holding real estate inside a Revocable Living Trust can be beneficial for a number of reasons. First, it offers protection you wouldn’t otherwise have, while still allowing you to buy or sell exactly the same way you would if you weren’t holding it in a Trust. Other advantages include:
The ability to avoid probate
Protection from creditors
Saving on estate taxes
Traditionally, the process of putting your property into a Trust was expensive and stressful. But today, online Estate Planning services like those offered by companies such as Trust & Will make the process simple, streamlined and best of all, affordable.
Home ownership is always an exciting opportunity. And when you’re informed about the process and you feel confident in your knowledge, it makes an otherwise potentially stressful experience easier to manage. Whether you’re taking out a mortgage, having a Deed of Trust or paying off an existing loan on your house, the more you know, the more powerful you can be in your decisions.
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