What Is a Deed of Trust?

Definition and Example of a Deed of Trust

A deed of trust is an agreement between you—the homebuyer—and your lender. It states that you'll repay the loan and that a third party will hold legal title to the property until you do. This third party is known as the "trustee."

A deed of trust is the security for your loan. It is recorded in the public records. If a state requires it, borrowers must agree to sign the deed of trust if they want to take out a home loan, just as they would have to do to sign a mortgage in another state.

How Does a Deed of Trust Work?

A deed of trust addresses three parties:

• The trustor, or obligor, who is the borrower
• The trustee, who holds "bare or legal" title (usually a title company)
• The beneficiary, who is the lender

The trustee doesn't represent either the borrower or the lender. The trustee is typically an entity such as a title company that holds "power of sale" in the event that you default on the loan. Once the deed is paid in full, the trustee reconveys the property to the buyer.

A deed of trust includes most of the same information as a mortgage, including:

• The original loan amount
• A legal description of the property used as security for the mortgage
• The names of parties: trustee, trustor, and beneficiary
• The inception and maturity dates of the loan
• The provisions and requirements of the mortgage
• Late fees
• Legal process in the event of default (a "power of sale" clause)
• Acceleration and alienation clauses, which detail when a homeowner is considered delinquent or when they can sell the home
• Riders such as prepayment penalties or the terms of an adjustable-rate mortgage

The trustee can file a notice of default in the event that the borrower doesn't pay according to the promissory note's terms. The trustee can also swap in another trustee to handle the foreclosure itself, by filing a formal Substitution of Trustee in most cases.

Deed of Trust vs. Mortgage

When you take out a loan to purchase a home, you will sign a mortgage or a deed of trust. These terms may often be used interchangeably, but there are some important distinctions.

Foreclosure

The trustee has the power to sell the property in the event of default, without a court procedure. This is called "nonjudicial foreclosure." It's a key difference between a deed of trust and a mortgage. With a mortgage, a bank must go through the court to initiate a foreclosure.

The trustee cannot complete the foreclosure until a certain amount of time passes from the notice of default. Some states allow a redemption period. In this case, the borrower has time to buy the property back after a nonjudicial foreclosure. Other states give borrowers the right to mediation before the foreclosure process begins.

State Laws

Some states don't recognize deeds of trust. Some states allow mortgages or deeds of trust. Others allow for both. Consult with a real estate attorney about the legal options and requirements where you live.

Deed of Trust vs. Promissory Note

The deed of trust documents the terms of the debt, secured by the property. The promissory note is a separate document, although it often goes hand-in-hand with a deed of trust.

A promissory note is a promise to pay, signed by the borrower in favor of the lender. It contains the terms of the loan, such as the interest rate and payment obligations. Legally, both a mortgage and a deed of trust are types of promissory notes.

The promissory note is marked "paid in full" when the loan is paid off. It's returned to the borrower along with a recorded reconveyance deed. The lender retains the promissory note during the term of the loan. The borrower has only a copy until the loan is paid off.