DOT: Deed of Trust
What is a trust deed and how is it used?
What is a Deed of Trust?
A deed of trust, also known as a trust deed, is a real estate instrument that is sometimes used when one party takes out a loan from another party and uses real estate to secure the loan. The deed of trust represents an agreement between the borrower and the lender to have the property title held in trust by a neutral third party until the loan is fully paid off.
Parties in a Deed of Trust
There are three parties involved in a deed of trust, as opposed to a mortgage which simply has a lender and borrower.
Trustor: The borrower (the party receiving the loan)
Beneficiary: The lender (the party providing the funds for the loan)
Trustee: Independent third party that holds legal title to the property.
Understanding Trust Deeds
In a real estate loan transaction a lender gives the borrower funds in exchange for a promissory note connected to a deed of trust. The trust deed transfers legal title of the real property to a neutral trustee (title company, escrow company, or bank) which holds it as collateral. The trustee holds the legal title until the borrower pays the debt in full, at which point the legal title to the property is transferred to the borrower. If the borrower defaults on the loan, the trustee takes full control of the property. Even though the trustee holds the legal title to the property, the equitable title remains with the borrower, as does full use and responsibility for the property.
Deed of Trust vs. Mortgage
Overall, both a deed of trust and mortgage function in a similar way and are both used in real estate lending to secure repayment of a loan. In other words, both documents are used to make sure the borrower pays back the loan. Additionally, both documents allow the property to be sold if the borrower cannot repay the loan.
The primary difference between a deed of trust and mortgage is the number of parties involved. A mortgage just has two parties, the lender and the borrow. A deed of trust, however, has an additional third party, called a "trustee" who holds the title of the property until the loan is repaid. If the loan isn’t repaid, the trustee is responsible for starting the foreclosure process.
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