Learn How a Deed of Trust Could Impact You

Depending on where you are buying a home, you might receive a copy of a deed of trust instead of a mortgage after you close on your real estate transaction.

This document is like a mortgage, but with a deed of trust it's easier for your lender to foreclose on your home if you stop making your loan payments on time. You also won't hold the title to your home under a deed of trust arrangement until you pay off your loan.

What are deeds of trust and how do they work? Here's a short primer.

What Is a Deed of Trust?

A deed of trust is a legal document commonly used in 20 states – though some states allow both mortgages and deeds of trust -- to secure a home loan. But unlike with a mortgage, a deed doesn't give you title to the home. Instead, the title of the home that you're buying rests with a neutral third party, usually a title company. You don't receive the title until you finish paying off what you borrowed.

Home sales work differently in states that use mortgages instead of deeds of trust. In a mortgage state, only two parties are involved in the real estate transaction: the buyer and the lender. With a mortgage, you hold the title to your home, even while you are making loan payments. Your lender holds a lien against the property.

Lenders gain a key benefit in deed of trust states: If you stop making your payments under a deed of trust, your lender can start a non-judicial foreclosure, one that doesn't require the assistance of courts. This means that the foreclosure process is an easier and faster one for lenders under a deed of trust arrangement.

Parties Involved in a Deed of Trust

A deed of trust involves three parties:

• Trustor: This is you, the borrower. While you don't hold the official title in a deed of trust, you do hold what is known as equitable title. This gives you the sole right to live in your home while you make your loan payments.
• Beneficiary: This is the lender, the financial institution lending you the money you use to buy your home. You'll pay back your lender in regular monthly payments, with interest.
• Trustee: This is the neutral third party that holds the title to your home until you finish paying off your loan. Usually, this is a title company or real estate attorney.

How a Deed of Trust Works

When you close on a home loan in a deed-of-trust state, you'll sign both a promissory note stating that you'll repay what you borrow and the deed of trust. Once you sign the deed, you are transferring the legal title to your home to the trustee, which is usually a title company or real estate attorney.

You'll retain equitable title, which gives you the right to live in the property as you make your monthly payments to your lender.

Once you pay off your home loan in full, the title company or attorney holding your home's title will transfer the title of the property to you. This makes you the titled owner of the home. It also removes the deed of trust.

What Is in a Deed of Trust?

A deed of trust includes several components :

• The full names of the three parties: The deed of trust will include the trustors, the people borrowing the money to finance a home purchase; the beneficiary, which is the lender; and the trustee, the neutral third party that holds the title to the property until you finish paying off the loan.
• Property description: The deed of trust also includes a legal description of the property, which usually includes a lot and block number in a subdivision plat map; the home's street address; and the county assessor's parcel number or tax identification number of the property.
• Loan terms: Deeds of trust include key information about the loan, including the repayment schedule; the maturity date, which is the day on which the loan's final payment is due; the loan's interest rate; information on what constitutes a default; and a power-of-sale clause, which gives the trustee the right to sell the property without court interference if you default on the loan.

Deed of Trust vs. Mortgage

The main differences between a deed of trust and a mortgage are the number of parties involved in each, who holds the title to a property and how the foreclosure process works.

Here is a quick look at the differences between a mortgage and deed of trust:

Pros and Cons of a Trust Deed

Taking out a home loan in a state that uses the deed of trust model comes with its own positives and negatives. Here is a look at the most important.

Deed of Trust Benefits

On the positive side:

• May have more flexible terms: You might pay slightly lower closing costs with a deed of trust when compared to a mortgage because this process often eliminates some administrative expenses. This savings varies greatly, though, as closing costs typically differ by lender. It's always best to shop around with several trusted lenders for the most affordable closing costs.
• May have lower foreclosure costs: Foreclosures are cheaper and quicker for lenders in a deed of trust because they don't have to first file a lawsuit in court to start the process. This is mostly a benefit for lenders. But if you have equity in your home, you might receive a check after the foreclosure process. This depends on how much equity you've built, how much the lender sells your home for and how much the foreclosure costs. Your lender will subtract any fees it incurs from the foreclosure before returning your equity. In a faster, cheaper deed of trust foreclosure, this might mean a bigger check for you.

Deed of Trust Risks

There are some increased risks for home buyers, though, in a deed of trust:

• Easier for lenders to foreclose: If you fall behind on your loan payments, your lender could start the foreclosure process faster than if you were instead paying off a standard mortgage.
• A more confusing process: Because a deed of trust includes an extra party – the trustee – it might be more confusing to buyers who might not understand why they don't hold the official title to their home.

Deed of Trust FAQs

Questions about deeds of trust and how they work? Here are answers to some of the most common.

What Happens to a Deed of Trust When You Pay Off the Loan?

After you pay off your home loan with a deed of trust, the third-party trustee transfers the legal title to your home to you. The trustee does this by filing a deed of reconveyance with your local county recorder's office. This document transfers the full legal title of your home to you and shows that you have paid off your home loan debt.

What Happens if You Default on a Deed of Trust?

If you stop making your payments, you could fall into default on your loan. If you do, your lender can move quickly to foreclose on your home, eventually evicting you from the premises. With a deed of trust, lenders can use a nonjudicial foreclosure, a foreclosure that does not require them to first file a lawsuit in court. With a mortgage, lenders must first file a lawsuit to start the foreclosure process.

Do All States Use a Deed of Trust?

Not all states use the deed of trust model. Instead, the majority of states use the mortgage model, and some let lenders choose from either model. Before applying for financing to purchase a house, make sure to confirm which model lenders in your state use.

Final Thoughts: Understanding a Deed of Trust

It's easy to confuse a deed of trust and a mortgage, but it's important to understand that these two financing models are not exactly the same. When you're ready to finance the purchase of your next home, make sure you speak with an experienced lender about which model your state uses. And if you're ready to apply for a mortgage, reach out to Freedom Mortgage. We can help you take the next steps to saving money with the best home loan option for your financial goals.