When you're buying a new home, the amount of paperwork can be overwhelming. One of the documents you might come across is called a deed of trust. It's essential to understand what this document is and how it works.

 

Definition of Deed of Trust

A deed of trust is a legal agreement between a home buyer and a lender during the closing of a property deal. It specifies that the borrower will repay the home loan while the lender will hold the property’s legal title until the loan is fully paid off. In some states, a deed of trust is used instead of a mortgage for secured real estate transactions.

 

In a deed of trust, there are three parties involved:

• Trustor -the borrower.
• Trustee - the third party who will hold the legal title to the real property.
• Beneficiary - the lender.

 

To be a legally binding document, a deed of trust must include several key elements, such as:

• The original loan amount
• A detailed description of the property
• The names of all parties involved
• The date when a loan was first taken out and the date when it is scheduled to be fully paid off
• The fees
• What will happen in case you can't make your mortgage payments
• Riders
• And other details based on the nature of the sale

 

How Deeds of Trust Work

A deed of trust is like a contract that says the property you're buying will be used as collateral for the loan. This means that if you don't pay back the loan, the lender can take the property away from you and sell it to get their money back. 

 

But the lender doesn't hold onto the property themselves. Instead, they give it to a neutral third party, like a title company or a bank, who will hold onto it until you pay off the loan. This third party is called the trustee, and they're responsible for making sure the lender gets their money if you can't pay.

 

Once you've paid off the loan, you'll get full ownership of the property. But if you can't pay, the trustee will take control of the property and sell it to pay off the loan.

 

Deed of Trust v. Mortgage

Many homeowners often mix up the terms “mortgage” and “deed of trust,” though they both serve the same purpose with a few distinctions.

Differences

There are some important differences between deeds of trust and mortgages that you should know about:

 

• Deeds of trust aren’t loans: A mortgage is a type of loan, but a deed of trust is actually an agreement. So, when you sign a deed of trust, you're not taking out a loan but rather agreeing to a set of terms related to your home purchase.

 

• Foreclosure type: The type of foreclosure you'll go through depends on the type of agreement you have with your lender. If you have a deed of trust, the foreclosure process will usually happen outside of the court system. However, if you have a mortgage, your lender will need to go through the courts to start the foreclosure process.

 

• Foreclosure length and expense: If you have a mortgage and you're worried about your lender taking back your property, you should know that it can be a lengthy and expensive process for them. This is because they have to go through a legal process called judicial foreclosure, which can take a lot of time and money. To avoid this, some lenders will use a different process called a deed of trust if it's allowed in your state. This can make it easier and faster for them to take back your property if they need to.

 

• The number of parties involved in the foreclosure: Another difference between the two is the number of parties involved. A mortgage has two parties - the borrower and the lender. On the other hand, a deed of trust involves three parties - the borrower, the lender, and a neutral third party called a trustee. The trustee holds the property title until the borrower pays off the loan. Suppose the borrower fails to repay the loan. In that case, the trustee will start the foreclosure process with the help of an escrow company's attorney.

 

Similarities

Some similarities between a deed of trust and a mortgage include the following:

 

• Both deeds of trust and mortgages allow lenders to take back your home if you don't follow the terms of your loan. They might use different methods to do so, but the end result is the same. These agreements are put in place to protect the lender's investment and ensure that you keep up with your payments. If you don't, the lender may take legal action to repossess your property.

 

• State laws dictate both of them. The contract your lender uses depends on what's legal in your state. Some states allow only a mortgage, while others allow only a deed of trust. A few states permit the use of both. The choice of contract type depends on the laws of your state and the lender's decision.

 

Are trust deeds a good idea?

Trust deeds are a helpful tool for managing your finances, but they're not a good fit for everyone. They work best for people who have a steady income and can stick to regular payments. It's important to note that trust deeds can sometimes lead to faster foreclosures compared to regular mortgages.

 

Bottom Line

A deed of trust is a legal agreement between a borrower and a lender that takes place during a property deal. It specifies that the borrower will repay the home loan while the mortgage lender will hold the property's legal title until the loan is fully paid off. Although deeds of trust and mortgages have some differences, they both allow lenders to take back your home if you don't follow the terms of your loan. 

 

Trust deeds are a helpful tool for managing your finances, but they're not a good fit for everyone. It's important to understand what this document is and how it works before signing one during the closing of a property deal.