What is a deed of trust?

A deed of trust is a contract between a lender, borrower, and trustee to secure property. Similar to a mortgage, it outlines your loan details and gives your lender the right to foreclose on your property if you stop making your loan payments. Whether you’re a new or experienced homebuyer, it’s important to understand how a deed of trust works and how it compares to a mortgage.

What is a deed of trust? 

A deed of trust is sometimes used in real estate transactions instead of a mortgage. It’s an agreement that states you’ll repay the loan and your lender will hold the title until the mortgage is paid in full. 

The following three parties are involved in a deed of trust:

• Trustor: The trustor is the borrower taking out the mortgage.
• Trustee: The trustee is the third party holding the property’s title, usually a title company.
• Beneficiary: The beneficiary is the lender originating the loan. 

The deed of trust also includes information about the loan, like the loan amount, a description of the property, and any fees included in the sale. The agreement also gives your lender permission to foreclose on your home if you’re unable to repay your mortgage according to the agreement. 

How does a deed of trust work? 

When you close on your home, you’ll sign a document called a promissory note, which is a promise to repay the loan with interest. This document also outlines your principal payments, interest rate, due dates, and maturity dates. 

A promissory note is linked to the deed of trust. The deed of trust transfers the title of the property to a third-party trustee, where it’s held as collateral until the loan is paid off. 

Once the borrower has repaid the loan — according to the payoff date listed on the promissory note — and the deed is returned to the homebuyer. If the borrower defaults on the loan, the trustee takes control of the property. 

What are the benefits of a deed of trust?

A deed of trust is more beneficial to the lender because it may allow for a faster foreclosure process if the borrower defaults on the loan. Some states allow a nonjudicial foreclosure for a deed of trust, which is much faster than a judicial foreclosure. 

What is a nonjudicial foreclosure?

If a borrower defaults on a deed of trust, the trustee can initiate a nonjudicial foreclosure. In a nonjudicial foreclosure, the lender doesn’t have to go to court to foreclose on your home, so the process is typically much faster. 

If you don’t reinstate the loan, you may receive a notice informing you that the home will be sold if you don’t repay the amount owed by a certain date. This is called a notice of sale, and only certain states require lenders to send it. You may also receive a notice of default, giving you time to make up any missing payments on your loan. 

Which states allow nonjudicial foreclosures?

The exact steps involved in a nonjudicial foreclosure vary from state to state, and not all states recognize nonjudicial foreclosures. Whether your lender initiates a judicial or nonjudicial foreclosure depends on where you live. The following states allow nonjudicial foreclosures:

Alabama, Alaska, Arizona, Arkansas, California, Colorado, District of Columbia, Georgia, Hawaii, Idaho, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, Oklahoma, Oregon, Rhode Island, South Dakota, Tennessee, Texas, Utah, Virginia, Washington, West Virginia, and Wyoming.

What is the difference between a deed of trust and a mortgage?

Many people use the terms mortgage and deed of trust interchangeably since there are similarities between the two. Both outline the loan agreement and state the lender’s right to foreclose on the property if the borrower stops making payments. 

In most cases, state law determines how a mortgage and deed of trust are handled. Some states only allow mortgages, while others offer the option of a deed of trust. If both options are available, your lender gets to choose which one to use.

But a deed of trust is typically used as an alternative to a mortgage, and there are a few differences between the two. While a mortgage is considered a type of home loan, the deed of trust is the legal agreement between all parties involved. 

The only parties involved in a mortgage are the lender and the borrower. In a deed of trust, there are three parties involved. The foreclosure process for a mortgage is typically handled judicially, while a deed of trust may go through the nonjudicial foreclosure process.

A judicial foreclosure takes much longer than a nonjudicial foreclosure, so a mortgage is usually more beneficial for the borrower. That means you can continue to live in the home while your lender starts the foreclosure process. 

What happens if the borrower defaults on a deed of trust?

A borrower goes into default when they stop making their mortgage payments, and it’s the precursor to foreclosure. The trustee will typically initiate the foreclosure process after 90 days of nonpayment. However, the 90-day waiting period is common practice and not legally required, so the trustee could start the foreclosure process sooner.

If you find yourself in default, there are steps you can take to catch up on payments to avoid foreclosure. Many states offer or even require mediation services. You may also be able to modify your loan terms and add your past due payments to the end of the mortgage. Some lenders may be willing to extend loan forbearance and temporarily suspend your mortgage payments.

What is a deed of trust FAQ 

What is the role of the trustee in a deed of trust?

The trustee is a neutral third party that holds the title to the property as collateral until the borrower has repaid the loan. If the borrower defaults on the loan, the trustee can begin the foreclosure process. 

Can a deed of trust be used in place of a mortgage?

Yes, a deed of trust can be used in place of a mortgage. Both a mortgage and a deed of trust act as a legal agreement between a borrower and a lender and describe how the loan will be repaid. A deed of trust, however, involves a neutral third party who holds the deed of trust. 

How do I choose between a deed of trust or mortgage?

Unfortunately, borrowers don’t get to choose whether they sign a mortgage or deed of trust at closing. You can figure out whether you have a mortgage or a deed of trust by checking the closing documents or contacting your loan servicer. 

Are there any disadvantages to using a deed of trust?

The biggest disadvantage is that if you default on the loan, the trustee can foreclose on the property. If the lender pursues a nonjudicial foreclosure, the process will go much more quickly than a judicial foreclosure.