What Is a Deed of Trust?
A deed of trust, most commonly used in real estate transactions, is an agreement between a borrower and a lender that the title to the property purchased by the loan will be held in trust by a neutral third party, a trustee, until the loan is paid in full. Once executed, the document is filed as a public record.
How Does a Deed of Trust Work?
There are three parties involved in the deed of trust:
- The Trustor who is the borrower.
- The Trustee who holds the title to the property in trust during the term of the loan.
- The Beneficiary who is the lender.
The deed of trust will list the amount of the loan, a legal description of the property which is the collateral for the mortgage, the names of all three parties involved, the inception and final maturity date of the loan, provisions and requirements of the mortgage, late fees, legal procedures in the event of default, acceleration and alienation clauses, and any riders such as a description in the case of an adjustable rate mortgage or prepayment penalties.
The trustee does not represent either the borrower or lender; usually the trustee is an entity such as a title company. It holds the power to sell the property in the event of default and is also responsible for legally conveying the property to the trustor once the loan is paid in full.
The deed of trust is the physical security of the debt or mortgage which is secured by the property. The promissory note, which is evidence and a description of the terms of the debt, is secured by the deed of trust.
Deeds of trust are not recognized in all states. This procedure is used in only about half of the United States.
Deed of Trust vs. a Mortgage
Deeds of trust are most commonly used by non-traditional lenders and have three parties involved: the borrower, the lender, and the trustee. A mortgage only involves two parties: the borrower and the lender.
The most distinguishable difference is in how foreclosure is handled. If a borrower is unable to pay the mortgage, the lender may foreclose on the property in order to sell it and recoup its investment. But, the lender must file a lawsuit in court to begin the process of foreclosure.
A deed of trust allows the holder of the promissory note to bypass the court system in order to begin foreclosure based on the terms spelled out in the document. This process is typically much quicker.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
With all of the discussion about the widening income gap in America, you may be wondering where you...Read More →