Deed of Trust
A deed of trust is a legal instrument used in some states as an alternative to a traditional mortgage to secure a loan for the purchase of real property. In this arrangement, the borrower temporarily conveys the legal title of the property to a neutral third party, known as the trustee, who holds it in trust for the lender, or beneficiary, until the loan is fully repaid.
This document serves as the lender’s security for the loan. Should the borrower fulfill their payment obligations, the trustee reconveys the title back to the borrower. If the borrower defaults, the deed of trust empowers the trustee to sell the property to satisfy the debt.
Purpose and Function
The primary purpose of a deed of trust is to provide a clear and often more efficient mechanism for lenders to protect their financial interest in a property. By placing the legal title with a trustee, the process of addressing a loan default can be streamlined, bypassing the often lengthy and costly judicial foreclosure process required with a traditional mortgage in many jurisdictions.
The three parties involved are:
- The Trustor: The borrower who is purchasing the property.
- The Beneficiary: The lender who is providing the funds.
- The Trustee: A neutral third party, often a title company or attorney, who holds the legal title and has the authority to act in the event of a default.
Deed of Trust vs. Mortgage
While both a deed of trust and a mortgage are used to secure real estate loans, they differ fundamentally in their structure and the foreclosure process they enable.
- Number of Parties: A mortgage involves two parties: the borrower (mortgagor) and the lender (mortgagee). A deed of trust involves three parties: the trustor, the beneficiary, and the trustee.
- Title Conveyance: With a mortgage, the borrower retains both legal and equitable title to the property, while the lender holds a lien. With a deed of trust, the borrower retains equitable title (the right to use and enjoy the property), but the trustee holds the legal title.
- Foreclosure Process: This is the most significant distinction. A mortgage typically requires a judicial foreclosure, where the lender must sue the borrower in court to obtain an order to sell the property. A deed of trust, however, usually contains a “power of sale” clause, which allows the trustee to initiate a non-judicial foreclosure, a faster and less expensive process that does not require court intervention.
Role in Foreclosure
The “power of sale” clause is the defining feature of a deed of trust in a foreclosure scenario. If the trustor (borrower) defaults on the loan, the beneficiary (lender) can instruct the trustee to begin the non-judicial foreclosure process. The trustee will then follow a series of legally mandated steps, which typically include recording a notice of default, notifying the borrower, and scheduling a public auction of the property.
This streamlined process provides lenders with a more direct path to recovering their investment, which is why deeds of trust are the preferred security instrument in many states. For borrowers, it underscores the critical importance of maintaining timely payments, as the path from default to foreclosure can be significantly accelerated.
