Deed of Trust: What Is It and How Does It Compare to a Mortgage?
For most buyers, purchasing a home means taking out a mortgage loan. But a mortgage isn’t the only way to secure a home loan. In some states, you’ll use a deed of trust instead.
Keeping reading to learn what a deed of trust is and how it works.
What Is a Deed of Trust?
A deed of trust is a document that secures a home loan by transferring legal title to the property to a neutral third party, called a trustee, until you’ve repaid your home loan in full. To secure a property means to offer it as collateral in the event that you default on the loan. So when you enter into a deed of trust, you promise to repay the loan, and you agree to forfeit the property if you’re unable to fulfill your obligations as they’re specified in the deed of trust.
In the meantime, you hold actual, or “equitable,” title. Equitable title doesn’t give you the right to sell the property, but it does make you responsible for the property and allow you to occupy, use and enjoy it.
Parties to a Deed of Trust
A deed of trust usually has three parties:
- Borrower: The borrower is the trustor, or grantor, who creates the trust.
- Lender: The lender is the beneficiary of the trust — the party to whose benefit the trust is created.
- Trustee: The trustee is a neutral third party, such as a title company, that holds legal title to the property until the loan is repaid.
After the borrower repays the loan, the lender prepares a release directing the trustee to transfer legal title to the borrower. The trust dissolves at that point because the terms of the agreement have been fulfilled.
How Does a Deed of Trust Work?
The trust deed itself is a contract that names the parties, identifies the property and specifies the terms and conditions of the loan. All three parties sign the contract.
If the borrower repays the loan according to the trust deed, the lender releases the lien and the buyer owns the property free and clear. If, on the other hand, the buyer defaults, the lender can direct the trustee to foreclose on and sell the property.
Deed of Trust vs. Mortgage
A deed of trust and a mortgage are similar in that they’re both agreements by which a borrower offers up the home they’re purchasing as collateral for their home loan. In other words, they’re both liens on the title to the property.
In addition, both can be transferred, or assigned, to another party, and recorded with the county so that they become public record. But the two instruments also have some differences.
Deed of Trust vs. Title
Whereas a deed of trust is a specific agreement between a borrower and lender, “title” is a nonspecific reference to rights of ownership that doesn’t explain what those rights are.
In the case of a deed of trust, the trustee has legal title, which gives the trustee the right to transfer ownership of the property. The borrower has equitable title, which gives them the right to acquire legal title, and in the meantime, use and enjoy the property and many benefits of ownership. For example, if the borrower rents out the property, the rent money they collect belongs to them. And should the property appreciate in value, the borrower keeps the difference in the event that they sell.
Parties to the Agreement
Whereas a deed of trust has three parties — the trustor (borrower), the beneficiary (lender) and the trustee, a mortgage has just two: the mortgagor (borrower) and the mortgagee (lender).
The most significant difference between a deed of trust and a mortgage is the way defaults are handled.
When a buyer defaults on a loan secured by a mortgage, the lender repossesses the home through foreclosure. In most states, the foreclosure is a judicial one — that is, it has to go through the court.
When a buyer defaults on a loan secured by a deed of trust, the trustee is responsible for selling the property on the lender’s behalf. In most cases, there’s no court proceeding needed. This nonjudicial foreclosure is usually faster than a judicial foreclosure.
Whether you use a deed of trust or a mortgage for your home purchase often depends on what your state law allows. Some states allow one but not the other, and some states allow both. Deeds of trust are actually more common.
The following states only allow deeds of trust:
- District of Columbia
- New Hampshire
- New Mexico
- North Carolina
- Rhode Island
- West Virginia
These states only allow mortgages:
- New Jersey
- New York
- North Dakota
- South Carolina
The remaining states allow both.
Deed of Trust vs. a Warranty Deed?
A deed of trust and a warranty deed both transfer ownership rights to another individual, but for different reasons.
A deed of trust protects a lender against buyer default — if the buyer doesn’t pay the loan, the trustee can sell the house to recoup the lender’s investment. A warranty deed, on the other hand, protects a buyer against liens on the property they’re purchasing.
Interesting To Note
The degree of protection a warranty deed provides depends on the type of warranty deed. A general warranty deed guarantees there are no liens on the property. A special warranty deed guarantees the seller hasn’t sold the property to anyone else and is unaware of any undisclosed liens.
Which Should I Use, a Deed of Trust or a Mortgage?
Most homebuyers have to use whichever instrument their state law requires. In states where you can use either, you’ll only benefit from one over the other in the event that you default on your loan. A mortgage is usually better in that situation because judicial foreclosure can be a lengthy process, which gives you more time before you must vacate the home.
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- Pueblo County. "How To Release a Deed of Trust."
- Rocket Lawyer. "Which States Allow Deeds of Trust?"
- LegalMatch. "What Is Equitable Title?"
- Quicken Loans. 2020. "Warranty Deed: What Is It, And Should You Get One?"