Deed of Trust
A deed of trust is a legal document used in many states as the security instrument for a mortgage loan. It involves three parties: the borrower (trustor), the lender (beneficiary), and a neutral third party (trustee) who holds legal title to the property until the loan is fully repaid.
What This Means
Deed of Trust vs. Mortgage
While the terms are often used interchangeably, a deed of trust and a mortgage are distinct legal instruments. The key difference is the foreclosure process. A deed of trust typically allows non-judicial foreclosure, meaning the trustee can sell the property without court proceedings if the borrower defaults. A mortgage generally requires judicial foreclosure through the court system, which takes longer and costs more. The instrument used depends on state law, not the borrower's or lender's preference.
How a Deed of Trust Works
When a borrower closes on a home in a deed-of-trust state, three parties are involved:
- Trustor - the borrower who grants the security interest
- Beneficiary - the lender who holds the loan
- Trustee - a neutral party (often a title company) who holds bare legal title
The trustee holds the power of sale. If the borrower fulfills the loan obligation, the trustee issues a deed of reconveyance returning full title to the borrower. If the borrower defaults, the trustee can initiate foreclosure proceedings on behalf of the beneficiary.
Recording and Priority
The deed of trust is recorded with the county recorder's office immediately after closing. Recording establishes the lender's lien priority. The recording date, not the signing date, determines where the lien stands relative to other claims on the property. This is why title searches and title insurance are critical components of every mortgage transaction.