A deed of trust secures repayment of a real estate loan issued by a bank or private lender. State law generally dictates whether a mortgage or trust is used in a transaction. If a deed of trust secures your loan, there is an extra party involved. The third party holds the property deed for the duration of the loan. Although you are a homeowner, you do not receive the deed until your loan is paid entirely. A deed of trust protects the lender if you default on the loan.
Owner of the Deed
The deed of trust identifies the borrower and lender, specifies the amount of the loan balance and provides a legal description of the property. It details fees, prepayment penalties, interest rates and legal procedures or provisions. Neither the borrower nor the lender actually owns the deed of trust. It is held by a neutral third party -- typically the title company -- which acts as the trustee. The lender is named as the beneficiary and the borrower is the trustor. If the borrower defaults, the trustee can sell the home on behalf of the lender. The trustee issues the deed to the borrower only when the loan is paid in full.
How a Deed of Trust Differs from a Mortgage
A deed of trust and mortgage are both used to create a lien on real estate. With a mortgage, the legal title is held by the lender until the borrower satisfies the loan debt. If the borrower doesn't pay the mortgage, the lender files a lawsuit against the owner to foreclose on the home. A deed of trust makes repossessing the home much easier. Unlike a mortgage, a deed of trust can contain a power of sale clause that makes a nonjudicial foreclosure possible if the borrower defaults. The clause allows lenders to bypass the court.
Deed of Trust Foreclosure Process
A lender isn't able to just take back the home if the borrower misses payments. The trustee is responsible for carrying out the foreclosure process. A lender initiates the procedure by notifying the trustee that the borrower has stopped paying the loan. The trustee issues a notice of default to the borrower and also records it at the local courthouse. Homeowners have a specified amount of time -- typically three months -- to catch up on all overdue payments and associated fees. If the debt isn't satisfied in that period of time, the trustee may begin advertising the foreclosure sale. The home is auctioned for the remaining loan balance. If no one bids, ownership is transferred to the lender.
Right of Redemption
Some states offer homeowners a right of redemption. In states that allow owners the chance to redeem the home, the trustee maintains possession of the deed for the length of the redemption period. During this period, the borrower can purchase back a home for the sale amount. The redemption period can be as short as a few days or longer than a year, depending on the state foreclosure laws.
- Cornell University Law School: Deed of Trust
- Foreclosure University: What Is a Trust Deed Foreclosure
- Realty Times: Trust Deeds, Mortgages, Contracts, Warranty Deeds - What Are They?
- Private Money Lending Guide: Mortgage Vs. Deed of Trust
- United State Foreclosure Laws: Washington Foreclosure Law Summary