What is a Deed of Trust?
What is a deed of trust and what does it mean if you’re a buyer or seller of a house? Read more to find out.
Anyone who takes out a loan to buy their home doesn’t own their home outright. As you make monthly payments, you get closer and closer to that outright ownership, which comes when you finally pay everything off.
At that point, it’s time to officially transfer ownership. This is legally done through a deed. The deed is the document that goes from one party to another when a home is fully paid off. It’s what you’re paying to get from your lender each month when your mortgage is due.
Most homebuyers are familiar with a mortgage. However, there’s an alternate method for working with a lender. This is through a Deed of Trust. Unlike a mortgage, three different parties participate in a Deed of Trust. You have the person borrowing money to make the purchase, the party lending the money, and a trustee.
For those buying a home, a Deed of Trust may end up being the preferred way to manage a loan in your state, which is why it’s important to understand how it works.
Information in a Deed of Trust
Although managed differently than a mortgage, much of the same information gets included in a Deed of Trust. Both documents speak to how you’ll pay off the loan you take out to purchase your home.
You’ll find the basic details in each document pretty much the same. These include:
- The loan amount.
- A legal description of the property.
- The names of all involved parties — trustee, borrower, and lender.
- The start and maturity dates for the loan.
- Mortgage provisions and requirements.
- Late fee information.
Items in a Deed of Trust that may sound different than what’s in a mortgage include clauses that cover defaulting, delinquency, and the eventual sale of the home. These will include actions required for the trustees which aren’t found in a mortgage. You may also see additional riders based on the terms of your particular situation.
Managing the deed
How a Deed of Trust manages a home loan is what makes it unique. The document brings in a third party. Known as the trustee, this party holds the property until the borrower can pay off what they owe the lender.
An impartial trustee is necessary in case the borrower defaults on their loan. In that instance, the trustee sells the property to satisfy the debt, and the borrower loses the home.
A trustee holds the legal title to the property with a Deed of Trust, but the borrower never loses the equitable title. They can live on the property, and are even required to maintain it. In that sense a Deed of Trust is similar to a mortgage. The borrower doesn’t have to wait until they can pay off the loan before taking physical ownership of the property.
Once the borrower pays off their loan, the title becomes theirs, same as if you have a mortgage.
The title difference
Wording on what type of title each party owns with a Deed of Trust is very important. There are distinct differences between the legal title for a property, and the equitable title.
The legal title focuses on the responsibilities of the property owner. In a Deed of Trust, the trustee retains the legal title until the loan gets paid off.
The borrower holds onto the equitable title for a property. It entitles them to use and enjoy their home as long as they make regular payments to the lender.
After the loan is complete, the borrower ends up with both the legal and equitable titles for their property.
Facing the consequences of defaulting
When you default on a mortgage, your lender can foreclose on your home by going through the court. Without that step the foreclosure cannot happen. This can make the process expensive and lengthy, which is potentially good for the homeowner.
When there’s a Deed of Trust in place, the trustee skips the courts. They have the right to initiate a nonjudicial foreclosure once a specified amount of time passes from the notice of default. Based on this time period, foreclosure often happens much faster if you have a Deed of Trust instead of a mortgage.
After foreclosure with a Deed of Trust, it’s up to the trustee to auction off the property. If it isn’t bought, ownership defaults to the lender.
The redemption period
One good thing about a Deed of Trust is that it can have a redemption clause written into it. This enables the borrower to take certain steps to stop the foreclosure process. Typically, a specific time frame is set aside for the borrower to pay all fees and money owed before the trustee can put the home up for auction.
Refusing a Deed of Trust
Not all states allow a Deed of Trust, even though it’s often preferable for smaller, non-traditional lenders. Other states don’t allow a mortgage, and only allow a Deed of Trust. Some states allow for both. It’s important to know what you’re working with where you live.
Thirty-five states will allow you to have a Deed of Trust. Of those 35, only nine also allow mortgages. In those specific states, your lender can decide which format they use.
If you live in a state, like California, that only allows for a Deed of Trust, and you’re thinking about buying a home, knowing how it differs from a mortgage is helpful.
The good thing is that both require you make regular, monthly payments to retain the right to live in the home. As long as you keep that in mind, you can stay on top of your loan and continue to get one step closer to full home ownership.