What Is A Deed Of Trust?

When you borrow money for a mortgage loan, you're obligated to pay back the loan with interest. Agreeing to this responsibility is an important part of the mortgage process and involves a deed of trust.

But what exactly is a deed of trust in real estate and how does it work? Learning more about this document will help better prepare you for the expectations your lender will have when you borrow money to buy a home.

What Is A Deed Of Trust On A Property?

A deed of trust is an agreement between a home buyer and a mortgage lender. This agreement states that the home buyer will repay the loan and that the mortgage lender can hold the legal title to the property until the loan is paid.

There are three parties involved in a deed of trust:

• The trustor (the person buying the home, the borrower)
• The trustee (the third party who holds the legal title)
• The beneficiary (the lender)

The deed of trust takes place at closing and transfers legal title of the real property to a third-party trustee (title company, escrow company or bank). This party holds it as collateral. Collateral refers to the home itself as it’s held as a form of security for the loan. In other words, if the borrower fails to repay the loan, the lender can seize the property to repay the debt.

What Does A Deed Of Trust Include?

A deed of trust must include certain information to be a complete legal document. Items that must be included in a deed of trust are as follows:

• Original mortgage loan amount: The original mortgage loan amount is the principal amount borrowed by the trustor (borrower).
• Description of the property: A deed of trust includes a detailed description of the property being bought.
• Names of all parties involved: The deed of trust will include the names of the individuals involved, including the trustor, trustee and beneficiary.
• Inception and maturity date of the loan: The inception date of the loan means the first day it is launched, while the loan maturity date refers to the date the borrower's last payment is due.
• Fees: Fees are also included on a deed of trust, including late fees that borrowers must pay if they don't make mortgage payments on time.
• Default penalties: The deed of trust will also indicate what happens in the case of default.
• Riders: Mortgage riders include any terms, conditions and situations that affect the loan but that do not exist in the original mortgage documents.

A deed of trust may include more information, depending on the nature of the sale.

How Does A Deed Of Trust In Real Estate Work?

During this real estate transaction, the lender gives the borrower the loan in exchange for one or more promissory notes. A promissory note, which is signed by the borrower, states that a borrower promises to repay the debt.

The promissory note also lists the loan terms, which should include the interest rate and any other obligations.

During the time that the buyer spends paying off their property, the promissory note stays with the lender. However, when the loan is repaid, the promissory note will be marked as "paid in full" and the deed goes back to the home buyer.

If the borrower defaults on the mortgage loan, then the trustee takes full control of the property.

What’s The Difference Between A Deed Of Trust And A Mortgage?

While deeds of trust and mortgages are both used for creating real estate liens, they both mean different things. Let's take a closer look at the differences between the two items:

• A mortgage is a loan, while a deed of trust is a document used in the mortgage process to secure the loan.
• A mortgage involves the borrower and lender, while a deed of trust involves three parties (the trustor, beneficiary and trustee).
• The foreclosure process is also different with deeds of trust and mortgages. In the case of mortgages, the lender will need to get a judicial foreclosure, while a deed of trust allows lenders to get a nonjudicial foreclosure. A judicial foreclosure means that your lender files a lawsuit with the judicial system and doesn't have a power of sale clause. The power of sale clause means that the lender has the power to sell the property if a homeowner defaults on the loan. In a judicial foreclosure, the borrower has time to make any delinquent payments. A nonjudicial foreclosure, on the other hand, usually occurs when your mortgage does have a power of sale clause. The trustee can seize the property and sell it in the case of borrower default on the loan.

The Bottom Line

As an agreement between a home buyer and a mortgage lender, the deed of trust is a key part of the mortgage process. It's important to understand your obligations as a home buyer before you receive the keys to your home.

When you’re ready to become a homeowner and uphold such responsibilities, you can start the mortgage process online.