Deed of Trust

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Blog Author :

Nanditha Saravanakumar

Edited by :

Alfina L.

Reviewed by :

Dheeraj Vaidya, CFA, FRM

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What Is A Deed Of Trust? 

Deed of Trust

A deed of trust acts as an alternative to a mortgage to finance the purchase of a property. However, with the growing prominence of the latter, the former has become less common, and currently, only thirty-five states in the United States allow financing through trust deeds. 

Table of contents
  • A deed of trust refers to a means of security associated with real estate properties purchased through financing.
  • The trustor buys property by obtaining a loan from the beneficiary. The legal title of the property is given to a third party, called the trustee. On repayment of the loan, the trustor will become the legal owner.
  • A deed of trust assignment differs from a mortgage in that the latter is a contract between the lender and the borrower. In the case of trust deeds, there are three parties.

How Does A Deed Of Trust Work? 

A deed of trust for property has three important parties – the trustor, trustee, and beneficiary. The trustor is the homeowner who purchases the property. Their asset is being held in the trust and will be held until the loan amount is fully paid off. Though the trustor will not be the legal title holder of the property, they will still be the property owner and enjoy the rights of one.

The trustee is the person who holds the title and hence, the property in the trust. They must legally transfer the title once the loan payment is in full. The beneficiary is the lender who helps finance the purchase. In some cases, the beneficiary can be the trustee too. For example, it can be the bank or the escrow company.

So, how does a trust deed differ from a mortgage? Though both are legal options to finance the purchase of a property, there are some differences between the two. The first distinction is the number of parties involved. In a deed of trust assignment, there are three players – the trustor, trustee, and beneficiary. Contrarily, a mortgage is a contract between the borrower and the lender.

Another difference is the mode of foreclosure. Foreclosure refers to the legal process to recover the balance loan, mostly by acquiring the collateral. A trust deed requires non-judicial foreclosure, as a result of which the time required would be less. While in a mortgage, judicial foreclosure is required, which can be time-consuming.

But the reason why these deeds became less prominent might be due to the legal title differences. For example, in a mortgage, the mortgagor (borrower) gets to hold the title despite a lien on the property. But in a trust deed, the legal ownership stays with a third party, which many people might not find appealing.

Components

So let’s analyze the structure of a trust deed.

  1. Names of parties – The information of the three parties – trustor, trustee, and beneficiary.
  2. The loan amount and terms of loan repayment.
  3. Physical description of the property.
  4. Date of inception and maturity of the loan.
  5. Fees and other charges.
  6. Clauses and other terms.

Example 

Let’s discuss an example of a real estate deed of trust to understand the concept better. Pam wants to purchase a house. She lives in Maryland and wants to finance the house through a trust deed. Her bank agreed to lend the loan and informed her that the house would be held in trust, with XYZ as the trustee, until she repays the loan. The loan period is 20 years, and further information regarding interest and other proceedings is communicated to her. Finally, Pam signed the contract with her bank and XYZ.

Deed of Trust vs Warranty Deed vs Grant Deed vs Deed

  • A deed is any document that has legal validity and is mainly used in real estate to affirm the title of a property or confirm any arrangement regarding the same. Examples include trust deeds, warranty deeds, grant deeds, quitclaim deeds, etc.
  • A warranty deed, as the name suggests, is a document that provides assurance or guarantee to the legal owner that the property is free of any future claims and rightfully theirs in all aspects. Thus, it protects the homeowner by guaranteeing them the legal title. As opposed to this, the trust deed protects the lender.
  • A grant deed is like a warranty deed and seeks to protect the property owner. However, a warranty deed is considered stronger than a grant deed due to the number of guarantees. Grant deed consists of two guarantees, whereas warranty deed has three. 
  • The guarantees in a grant deed are that the grantor (seller of the property) assures that the property has not been sold to another party and that the property has no existing encumbrances.
  • The warranty deed contains these guarantees, as well as a third one. It states that the title to the property is free of any future claims or lien.

Frequently Asked Questions (FAQs)

1. Who is the trustee in a deed of trust?

In a real estate deed of trust, the person who holds the legal title of a property is the trustee. This person transfers the title to the trustor or the person with a primary interest in the property once the loan is fully repaid. In some cases, the trustee is the beneficiary, too, i.e., the lender.

2. Does the deed of trust show ownership?

Yes. According to the deed of trust, the trustee is the rightful owner. However, its primary purpose is not proof of ownership. Instead, it acts as a security for repayment or collateral. Also, the trustor can enjoy all the privileges of home ownership, even if the trustee is the owner.

3. What happens when a deed of trust is paid off?

When the trustor completely pays off the loan to the beneficiary, the trustee must dissolve the deed and transfer the property to the trustor.