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Understanding When and How to Use a Deed of Trust

When buying real estate with borrowed money, or financing the sale of real estate you own, a deed of trust may be one of the required documents you will sign at closing.

What Is a Deed of Trust?

A deed of trust is a legal document that is the security for a real estate loan. The document itself is recorded with the county recorder or registrar of titles in the county where the real estate is located. 

When a deed of trust is required by state law, it is just one of many forms the parties sign at the real estate closing. Typically, the deed of trust is prepared by the lender, who is agreeing to put up money to finance the buyer's purchase.

How Is a Deed of Trust Different from a Mortgage or a Promissory Note?

In some states, a deed of trust is used instead of a mortgage. A mortgage agreement creates a lien against the real property, protecting the lender from a situation where the borrower defaults on their obligations. While both a deed of trust and a mortgage provide a security interest for the lender in the property, the lender does not hold the security interest as is the case in a traditional mortgage. A mortgage agreement is between two parties: the borrower and the lender. With a deed of trust, a third-party trustee holds the equitable title to the real property secured by the deed. 

Deeds of trust are used in conjunction with promissory notes. The deed of trust is the security for the amount loaned to finance the real estate purchase, and is secured by the underlying piece of real estate. The deed of trust is what secures the promissory note. The promissory note includes the interest rate, the payment amounts and terms, and the buyer's promise to pay the lender the amount borrowed plus interest. 

The promissory note is held by the lender until the loan is paid in full, and generally is not recorded with the county recorder or registrar of titles (sometimes also referred to as the county clerk, register of deeds, or land registry) whereas a deed of trust is recorded.

Who Are the Parties to a Deed of Trust?

There are three parties to a deed of trust, as opposed to a traditional real estate mortgage in which the parties are simply the borrower and the lender. A deed of trust includes the following parties:

  • Trustor – This is the borrower (the person purchasing the home or other piece of real estate).
  • Lender – This is the person or entity putting up the funds for the purchase.
  • Trustee – This is an independent third party that holds legal title to the real estate. The trustee is independent because they do not represent either the seller or the buyer in a real estate transaction. The trustee is usually a separate legal entity like a title company.

In some cases, there is a fourth party to a deed of trust, known as a guarantor. This is someone else who signs along with the trustor, providing another avenue for the lender to be repaid in the event the borrower defaults on their obligations.

What Are the Trustee's Rights under a Deed of Trust?

The trustee retains the right to sell the property if the trustor (borrower) defaults on their obligations under the agreement. If the terms of the loan are met and the buyer meets their obligation, then the trustee transfers/reconveys ownership of the property to the buyer who will then hold equitable title to their property.

When Should a Deed of Trust Be Used?

Some states are "mortgage states" that do not use deeds of trust. In other states, state law requires the use of a deed of trust whenever the buyer is borrowing some or all of the money needed to finance their purchase of real estate. In approximately 15 states, either a mortgage or a deed of trust may be used to secure the lender's interest in a real property transaction. 

From the lender's standpoint, using a deed of trust may be preferable because doing so allows them to legally sidestep what can be a time-consuming and expensive judicial foreclosure process, if the borrower defaults on their loan payments. 

Other Uses

While this article focuses on deeds of trust being used for the initial purchase of real estate, they may also be used for other types of loans and contracts when the real estate will serve as collateral for the loan or performance of the contract.

What Information Should Be Included in a Deed of Trust?

A deed of trust should include key information about the transaction. As with any legal document, it is important to ensure this information is accurate before signing a deed of trust at closing. Deeds of trust typically include the following components:

  • The dollar amount being financed (the principal, or the amount of funds the lender is providing for the purchase).
  • The start date or inception date of the loan, and the maturity date. The maturity date is the date when the loan is expected to be paid in full.
  • The legal description for the property. This is different from the property's street address. The legal description is the official description on file with the county, identifying the parcel of land. It may be a "metes and bounds" description, or it may identify the official name for the subdivision, the block number in the subdivision, and the specific lot number being purchased. If you are preparing a deed of trust and are not sure what the legal description for the property is, check with the county recorder's office to obtain the correct language to use.
  • Additional information describing the property such as diagrams or floor plans, although these are not legally required to be included.
  • The parties to the transaction. As discussed above, the parties include the trustor (the borrower), the lender, and the trustee who will hold title until the loan is paid in full.
  • The specific provisions, terms, and requirements of the mortgage, as agreed to by the parties.
  • The amount of late fees that will be assessed if payments are not made on time as agreed, and provisions around when they will be assessed. For example, while payments on the loan may be due on the first of each month, the deed of trust may provide that late fees will be assessed and due if the loan payment is not received by the 15th day of the month it is due.
  • Specifics about the legal procedures that will apply if the terms of the loan are not met. This may be referred to as the "power of sale" clause. This is the language that legally authorizes the trustee to sell the property outside of court if the buyer does not meet his or her obligations under the deed of trust and promissory note.
  • An acceleration or alienation clause, which is a provision that allows the lender to require immediate payment in full if certain events occur. For example, if the trustor (the buyer) transfers title and sells the property, the lender will be entitled to payment in full of the remaining balance due and any outstanding fees and interest.
  • Prepayment penalties, if applicable. If this provision is included, the trustor (buyer) will have to pay an additional sum of money if they want to pay the outstanding loan balance in full before its maturity date.
  • Terms for adjustable rate mortgages (ARMs) may also be included as a rider to a deed of trust.

What Duties Does the Trustee Have under a Deed of Trust If the Buyer Does Not Meet Their Obligations?

If the borrower does not follow through with their obligation to make payments as specified in the agreement, then the trustee is authorized to take legal action on behalf of the lender. These provisions will be spelled out in the deed of trust, and are governed by state statutes. The trustee may substitute another trustee in their place to handle the foreclosure process. 

Regardless of who is serving as trustee—whether it is the original trustee or a substitute trustee for the foreclosure—the required legal formalities must be met. The trustee is responsible for taking the following actions when the buyer defaults:

  • Filing or mailing notices for public records
  • Publishing notices in legal newspapers for a set period of time (as defined by state statutes)
  • Taking any other action specified under state law

When those requirements have been met, the trustee is authorized and required to sell the property at a trustee's sale without going through a formal judicial foreclosure process. Any such trustee's sale must be neutral, without benefiting either the trustor or the trustee. Trustee's sales are binding and final.

The trustee must then distribute the proceeds, with the lender having a right to the proceeds up to the amount of the unpaid loan and the buyer receiving the remainder. 

The buyer does retain certain rights during the foreclosure process, before the trustee's sale. For example, after the trustee records a notice of default with the county, the borrower has a certain period of time (as specified by state law) to reclaim the property by making all required payments and paying any fees imposed by the trustee. The time period for the power of sale provision varies from state to state, ranging from two weeks to four months or more.

What You Should Do before Signing a Deed of Trust

Before you sign a deed of trust, it is important to understand what you are signing. You should know what your obligations are, and what the trustee's rights are, under the agreement. You should also double check:

  • your name is spelled correctly,
  • the dollar amount of the principal amount borrowed and the payment amounts look correct,
  • the interest rate is what you agreed to, and
  • you understand any prepayment penalty provisions.

When you are ready to sign a deed of trust, the parties will need to sign in the presence of a notary public. This documents that the parties' signatures were authentic. 

The deed of trust must then be recorded with the county where the property is located, and each of the parties (the trustor, trustee, and lender) should keep a copy of the recorded document.

Understanding what a deed of trust is and how it works is important for anyone involved in a transaction where a deed of trust will be used instead of a mortgage agreement.

How to Create a Deed of Trust

Use our deed of trust form to quickly and easily create your legal document today.