7 min read Jul 05, 2024

Deed of Trust: What Is It and How Does It Work?

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Edited By

Prayas Biswas

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Editor
Edited By

Prayas Biswas

Editor, Houzeo
About

Prayas B. is a detail-oriented content editor specializing in American real estate. In his free time, he enjoys hitting the pitch for a game of football or watching motorsports.

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The number of borrowers who missed mortgage payments has increased by 16% over the last year, contributing to financial instability for all involved parties. If you have a regular income source, getting a deed of trust can help the lender feel secure.

If you default, the title of the home will go to a neutral third-party and the loan will be foreclosed. This is why it’s crucial to find a home within your budget; it can help you avoid defaults in the first place. 

At Houzeo, we offer resources to meet your home-buying needs all in one place. Check out our list of homes for sale near you to find one that suits you best. Your journey to homeownership begins right here, so don’t wait!

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What Is a Deed of Trust?

A deed of trust is a legal agreement used in 25 states, and the District of Columbia during real estate transactions, as an alternative to a conventional mortgage. It describes the terms of a loan secured by the buyer and lender. 

There are three parties involved in a deed of trust transaction. The borrower is the person who borrows money from the lender. A deed of trust makes the loan secure by transferring the home title to a neutral third party called trustee.

Under the agreement, the trustee holds the property for the benefit of the lender. Once the borrower repays the complete loan, the trustee transfers the title to the borrower. However, if the borrower defaults on the loan, the trustee sells the property to recover the remaining loan balance.

Parties Involved in a Deed of Trust:

  • Borrower (Trustor): You, the homebuyer, who takes out the loan to finance the property purchase.
  • Lender (Beneficiary): The bank or financial institution that provides the loan for your purchase.
  • Trustee: A neutral third party, often a title company, that holds the legal title of your property during the loan repayment period.

Key Information in a Deed of Trust:

There are two main documents in a deed of trust in real estate. First, the lender gives one or more promissory notes to the borrower that details the amount and the term of the loan. 

Then, the lender and the buyer sign a deed of trust. It contains the following information:

  • Original loan amount
  • Detailed description of the property
  • Names of all involved parties (trustor, trustee, beneficiary)
  • Loan start and end dates (inception and maturity dates)
  • Associated fees
  • Procedures in case of default
  • Additional clauses specific to the transaction or nature of sale

How Does a Deed of Trust Function? 

The deed of trust outlines the responsibilities of each party involved and the steps taken throughout the repayment process. Here’s how the whole process works:

  1. Sign the Deed of Trust: At closing, you sign the deed of trust along with the lender and trustee. This agreement outlines the loan terms, including the amount borrowed and the repayment schedule.
  1. Transfer the Legal Title: The deed of trust temporarily transfers the title of your property to the trustee, which holds it as collateral for the promissory notes. You, however, retain the right to live in and maintain the property.
  1. Make Loan Payments: You diligently make your monthly mortgage payments to the lender according to the agreed-upon schedule.
  1. Consequences of Non-Payment: If you fail to make your loan payments, the lender will notify you and the trustee. The trustee, following the guidelines outlined in the deed of trust, may initiate foreclosure proceedings
  1. Loan Completion and Title Transfer: Once you repay all your loans, the lender informs the trustee. The trustee then transfers the legal title of the property to you, solidifying your full ownership.

Power of Sale: What Is It?

The power of sale clause in a trust deed gives the trustee the authority to sell your property. They can do this to recover the outstanding loan balance in the case of loan default.

The trustee can sell the property without the need for a lengthy court process. Not all states allow power of sale clauses in deeds of trust. Some states require a court foreclosure process even if the deed of trust includes a power of sale provision. 

A few states that recognize the power of sale are Alabama, Alaska, Arizona, and Arkansas. On the other hand, New York, New Jersey, and Florida are some states that don’t recognize this provision.

Deed of Trust vs. Mortgages: What Are the Key Differences?

While both mortgage and deed of trust in real estate act as security for your home loan, there are some key distinctions between the two. Let’s break down these differences to understand which one can be better for you:

FeatureMortgageDeed of Trust
Parties InvolvedTypically involves two parties: the borrower and the lender.Involves three parties: the borrower, the lender, and a neutral third-party trustee who holds the legal title during repayment.
What They AreA mortgage is a type of loan.A deed of trust is not a loan but an agreement.
Foreclosure ProcessForeclosure with a mortgage usually requires a court order.Deeds of trust can often include a power of sale clause. This allows the trustee to sell the property to recover the loan balance without going through court.
Geographic PrevalenceMore common nationwideCommon in 25 states

What Makes a Deed of Trust More Beneficial Than a Mortgage? 

Here’s a quick rundown of the advantages of a deed of trust over mortgages for borrowers: 

  • Lower Interest Rates: Deeds of trust can sometimes lead to lower interest rates compared to other types of loans because they provide the lender with a higher level of security.
  • Quicker Foreclosure Process: In the event of default, a deeds of trust allow for a non-judicial foreclosure process. This can be quicker and less expensive than a judicial foreclosure. It often benefits borrowers by reducing legal costs.
  • Flexibility: Deeds of trust can offer more flexibility in terms of loan structures and repayment schedules compared to other types of security instruments.
  • Avoiding Deficiency Judgments: In some states, non-judicial foreclosures via a deed of trust can prevent lenders from seeking deficiency judgments. This means the borrower is not liable for any shortfall if the property sells for less than the loan balance.

Should You Opt for a Deed of Trust?

Understanding deeds of trust is crucial for you, as a homebuyer, to be better prepared to manage your mortgage and protect your home investment. However, you should opt for a trust deed only when you have a fixed income source. 

Choosing a house within your budget is the first strategic step you can take to avoid a foreclosure or even a missed payment. With Houzeo, it’s never been easier. Browse through thousands of listings below to find a suitable house and begin your home-buying journey today!

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Frequently Asked Questions

What happens in a trust deed?

A deed of trust is a legal agreement in which a trustee holds your property title until you repay your loan. If you default, the trustee can sell the property to recover the cost.

What is the difference between traditional mortgages and deeds of trust?

There are several differences between traditional mortgages and deeds of trust. Traditional mortgages involve two parties: the borrower and the lender. In contrast, deeds of trust have three parties: the lender, the borrower, and a trustee.

Traditional mortgages also have a judicial foreclosure process. The lender moves to court if you default on the loan. However, in a deed of trust, the third-party that holds the title is allowed to begin sale proceedings in case of a default without the involvement of a court.

Are trust deeds a good idea for home financing?

Deeds of trust can be more beneficial for home financing than a traditional mortgage for borrowers with a regular income. However, you should avoid it if you don’t have a fixed income source. This is because deeds of trust foreclosures can be faster and stricter than for traditional mortgages.

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