What Is a Deed of Trust on a Property?
A deed of trust is a legal agreement that is sometimes used in place of a mortgage in real estate transactions. They are very similar, but a mortgage involves only the lender and a borrower, while a deed of trust adds a neutral third party known as a trustee. The trustee holds rights to the real estate until the loan is paid or the borrower defaults.
You may be wondering which you need for your home purchase — deed of trust versus mortgage — and what the practical differences are. We’ll cover the differences between a deed of trust and a mortgage, and let you know which is allowed in your state.
Deed of trust definition
A deed of trust is a legal agreement that makes a property collateral for a loan. If the loan is not repaid, the lender can take possession of the property.
A deed of trust looks a lot like a mortgage because it contains many of the same details — all of the necessary details about a home purchase, including:
- The names of the borrower, lender and trustee
- The loan amount
- The address of the property
- Loan repayment details
- What happens in cases of late or missed payments
- Fees (e.g. homeowners association or other community fees)
- Conditions of the loan (e.g. occupancy or property insurance requirements)
- Riders, which are addendums that provide more nuanced information about the mortgage or property type
You can view a deed of trust example document at the Consumer Financial Protection Bureau (CFPB).
Deed of trust vs. mortgage
Both a deed of trust and a mortgage are agreements that tie the home you purchase to your home loan as collateral, giving the lender a way to foreclose if you don’t make your mortgage payments.
The main differences have to do with who’s involved, who holds title (or legal ownership) and what foreclosure options are available to the lender.
| Deed of trust | Mortgage | |
|---|---|---|
| Who’s involved | Three entities:
| Two entities:
|
| Who holds the title: | The trustee | The borrower |
| How a foreclosure happens: | Non-judicial foreclosure (the trustee can sell the property without a court order) | Judicial foreclosure (the lender must obtain a court order) |
Whether you have a deed of trust versus a mortgage is disclosed in your home’s closing statement. In all cases, the borrower gets sole use of and responsibility for the property.
What is a trustor vs trustee?
In a deed of trust, the trustor is the borrower and the trustee is a third party that holds the property’s title. Trustees are usually title companies.
How does a deed of trust work?
In a deed of trust, both the borrower and the lender entrust an independent third party — typically a title company, trustee company or bank — to hold legal rights over the real estate securing the loan.
A deed of trust can benefit the lender because it allows for a faster and simpler way to foreclose on a home — typically months or even years faster. Most deeds of trust have a “non-judicial foreclosure” clause, which means that the lender won’t have to wait for the court system to review and approve the foreclosure process.
What happens when a deed of trust is paid off
Once the borrower fully repays the loan, the third party — the trustee — releases all rights to the owner. If the borrower defaults on the loan, the trustee forecloses on the property, sells it and divides the money accordingly.
How to get a deed of trust
Deeds of trust are recorded in public government records with the recorder or registrar of titles in the county where the real estate is located.
Do I need a deed of trust or mortgage?
Whether or not you can use a deed of trust or mortgage (or have the option to choose either) is up to your state’s laws.
Frequently asked questions
Yes, a deed of trust shows ownership — in legal terms, this is known as “title.” However, there are two kinds of titles: legal title and equitable title. With a deed of trust, the trustee holds legal title and the homeowner holds equitable title (while the borrower is still paying back the loan). Then, once the loan is fully repaid, the homeowner gains full title.
A deed of trust is a type of loan, whereas a warranty deed is a document that shows you have clear title to a piece of real estate and all the rights associated with full ownership.
An error on a deed of trust can usually be corrected, but the exact nature of the error determines how difficult this will be. If the error was relatively minor — such as a typographical error or problem with the notarization — you may be able to re-record the deed of trust or file an affidavit that effectively corrects the error. However, if the error is more significant, or if all of the parties involved don’t agree, you may have to file a lawsuit to correct the record. Consult with a real estate lawyer if you have concerns about your deed of trust.