A deed of trust, also known as a trust deed, is a legal document sometimes used in place of a mortgage when purchasing real estate with borrowed money or financing the sale of a property.
Definition and Distinction
A trust deed transfers the legal right to a property to a third party—typically a bank, title company, or escrow firm—to hold as security for the lender's benefit until the borrower repays the debt.
Parties sign it during the closing of a property purchase with borrowed funds or during a seller‑financed sale. The lender who typically finances the buyer's real estate purchase prepares the deed of trust and records it with the area's county registrar.
Trust Deed vs. Mortgage
While people often use "trust deed" and "mortgage" interchangeably, they differ in key ways:
- Parties Involved: A mortgage consists of the borrower and the lender. A trust deed involves the trustor (borrower), lender, and trustee.
- Type of Foreclosure: A mortgage requires judicial foreclosure through the courts. A trust deed enables non‑judicial foreclosure, handled without court involvement.
- Foreclosure Timeline: Judicial foreclosure may take months or even years. Non‑judicial foreclosure with a trust deed often moves faster and costs less.
Key Parties
A deed of trust includes three primary roles:
- Trustor (Borrower): The trustor borrows money to purchase the property. Although the trust holds the home's legal title during the loan period, the borrower remains the equitable owner and continues to enjoy full use and control of the home, provided they make timely payments under the agreement.
- Lender (Beneficiary): The beneficiary is the individual or institution that lends the money. The lender holds a financial stake in the property and gains the legal right to foreclose if the borrower defaults.
- Trustee: A neutral third party—often a bank, attorney, or escrow company—holds the property's legal title until the borrower fully repays the loan. If the borrower defaults, the trustee initiates foreclosure on behalf of the lender. Once the borrower pays off the loan, the trustee dissolves the trust and transfers the legal title to the borrower.
Some trust deeds include a guarantor—a fourth party who signs the trust deed alongside the borrower. This person provides additional security for the lender by promising to assume responsibility for the loan if the borrower fails to pay.
Implications for Homebuyers
A deed of trust outlines the terms and obligations of the loan arrangement between the borrower and lender. It legally secures the lender's interest in the property while granting the buyer the right to occupy and use the home.
When buyers use a loan to finance a home purchase, the lender requires collateral in case of default. The deed of trust serves this purpose by giving the lender the right to take ownership of the property through foreclosure if the borrower fails to meet the loan terms.
For homebuyers, the deed of trust confirms their agreement to repay the loan while allowing them to enjoy ownership benefits. Even though the trustee holds the legal title, the buyer keeps the right to live in and manage the property.
The non‑judicial foreclosure process tied to trust deeds provides a faster, more streamlined method for lenders to reclaim the property compared to the judicial process required with mortgages. This feature makes trust deeds a standard option in states that allow them.
Once the borrower repays the loan in full, the trustee removes the trust and officially transfers the title to the buyer. At that point, the home belongs solely to the buyer, free of lender claims.
Takeaway
A deed of trust is central to real estate transactions involving loans. Involving a third‑party trustee protects both lender and borrower, defines the conditions for repayment, and allows for efficient resolution if the borrower defaults.
Understanding the roles and mechanics behind a trust deed helps buyers and sellers navigate real estate transactions confidently. When entering into an agreement that includes a deed of trust, review all terms carefully and consult professionals to clearly understand your rights and responsibilities.