With a deed of trust, a lender loans money to a borrower to purchase a home or other property. As security against the loan, the borrower gives legal title to the property to the lender.
What is a Deed of Trust?
A Deed of Trust is a document officially recognizing a legally binding relationship between the borrower, lender, and trustee.
The trustee holds this title in trust for the lender until the borrower pays the loan in full. Once the borrower pays off the loan, the trustee returns the title to the borrower.
As a reference, a deed of trust agreement is sometimes called:
- Trust Deed
- Mortgage Trust Deed
Deed of Trust vs. Mortgage
A deed of trust and a mortgage agreement create a lien on a piece of property in connection with a loan agreement or promissory note.
The significant difference between the two agreements is the lender’s remedy if the borrower defaults on the loan.
Here is a simple chart explaining the differences between the two agreements:
| Deed of Trust | Mortgage Agreement | |
|---|---|---|
| Who are the parties: | Borrower Lender Trustee (escrow company, title company, neutral third party) | Borrower Lender |
| Who holds legal title: | Trustee | Lender |
| Who holds equitable title/right to use the property: | Borrower | Borrower |
| What happens if the Borrower defaults: | Non-judicial foreclosure sale without a court order | Foreclosure sale through the court system |
You can choose from four other types of deeds along with a deed of trust and mortgage agreement.
Review the differences between deeds, and select the right one for your real estate transaction.
What Should I Include in a Deed of Trust?
The contents of a deed of trust are essential to ensure it covers all the necessary points.
To create a legally binding agreement, you should include the following details.
Party Information
There are three main parties to the deed of trust:
- Borrower – The person securing the loan (borrowing the money and pledging the property)
- Lender – The entity providing the loan (lending the money and receiving lien against the property)
- Trustee – A person or entity who holds the title to the property for the lender
There may also be a guarantor who agrees to be financially responsible for the loan or a co-signer who assumes equal liability for paying the loan.
Who serves as a trustee for a deed of trust?
The trustee is a neutral third-party, such as an attorney, real estate broker, escrow agency, trust company, or title company. Check your state’s laws for restrictions on who can be a trustee.
Loan Details
The loan details outline the structure of the purchase deal and how you will repay it:
- Amount borrowed
- Payment terms
- Amount of each payment
- Interest details
- Interest adjustment date
- Date of the last payment
What is the amount borrowed on a mortgage?
The amount borrowed only includes the money you received from the lender to pay for the property. It does not include interest and fees.
Property Address
This entry is the address of the property.
Does address mean mailing or physical address?
In this situation, the address means the actual physical location, the property’s street address.
Legal Description
The description is a succinct and precise description of the property’s location.
What should I include in a legal description?
The description should consist of exact survey information about the measurements of the property (e.g., metes and bounds, lots and blocks). It can also include details regarding any structures.
Accuracy is essential.
Power of Sale
The power of sale is a clause added to the deed of trust outlining the lender’s rights to sell the property if the borrower defaults.
What’s the difference between non-judicial foreclosure and judicial foreclosure?
A deed of trust almost always contains a “power of sale” clause that allows the trustee to sell the pledged property in a non-judicial foreclosure sale.
This means the trustee can bypass the court system and go straight to the foreclosure sale process.
Non-judicial foreclosure
Unlike judicial foreclosure, a non-judicial foreclosure is a quick process, and the property can be sold in as little as two to three months.
Judicial foreclosure
In judicial foreclosure under a mortgage agreement, the lender can only sell the property after receiving a judgment from the court authorizing the sale, forcing the lender to go through the formal court process – filing the complaint, receiving an answer and possible counterclaims, arguing in a formal trial, and finally receiving a judgment.
And the judgment may not even come out in the lender’s favor.
The judicial foreclosure process could take several months to years, depending on the court calendar, defense claims, and other unanticipated factors.
Timeline For Foreclosure
Do all states allow a power of sale clause?
This clause is allowed in 29 states and the District of Columbia.
Some states require using the foreclosure process instead.
Additional Provisions
These provisions cover further details in the deed of trust.
- Prepayment Penalty: fees the lender imposes for paying the mortgage off early
- Alienation: the borrower must pay the loan in full if selling property
- Covenants: the borrower declares and promises ownership of the property and has the authority to mortgage the property
- Default and Acceleration: the entire amount of the loan becomes due if the borrower defaults
- Maintenance of Property: the borrower must maintain the property in good repair and obtain an acceptable amount of insurance for the property
- Ownership Transfer: if the borrower transfers ownership, the entire amount of the loan may become due
- Rights of Lender: the lender can make payments to maintain the value of the property, which it can then add to the total loan amount
- Security Interest: the deed of trust also secures any other liabilities of the borrower to the lender
- Senior Mortgages: senior mortgages can not be modified without the lender’s permission
- Applicable Law: indicates the state’s law that will govern the agreement
- Document Recording: indicate the county or local clerk’s office where the document will be recorded to ensure searches of the property will reflect the lien
When Do I Need a Deed of Trust Form?
A deed of trust is an important security instrument in real estate transactions.
Especially after the housing crisis in 2008 and today’s uncertain economy, lenders want added security that they will recoup the money they are lending to borrowers.
Because of this convenience, many states are moving away from mortgage agreements and allowing lenders to use deeds of trust.
Here is a table detailing some common borrowers and lenders who might need one:
| Possible lender | Possible borrower |
|---|---|
| Seller of a property or home | Buyer of a property or home |
| Private investor | Professional ‘flipper’ |
| Private mortgage company | Company looking to purchase an office |
| Family member 1. Uncle or aunt helping their favorite family member 2. Older wealthier family member divesting estate (i.e. grandparents) | Family member 1. Nephew or niece paying for first home or apartment 2. Younger less wealthy family members in need of financial assistance (i.e. grandchildren) |
| Sympathetic friend with extra funds (i.e. able to lend but not give money) | Reliable friend needing cash (i.e. for a real estate investment opportunity) |
A lender must file a deed of trust with the appropriate local recording office. If you are filing a deed of trust, leave space at the top of your document for the county recorder’s office to put their seal on it.
Why not just get a loan from the bank?
A private mortgage is a popular alternative to traditional loans from a large institutional bank. These banks and other conventional lenders often have strict lending conditions, lots of paperwork, and little wiggle room. In a private mortgage, both lenders and borrowers have more flexibility.
Lenders
Lenders in a private mortgage can be a family member, a private investor, or a lending company specializing in private loans.
They can work with borrowers and develop creative solutions, including variable interest rates, higher down payments, and shorter payback periods while earning interest on their excess capital with a secured investment.
Borrowers
Borrowers who may not otherwise qualify for a traditional loan may have no choice but to opt for a private mortgage.
Self-employed individuals who cannot show a steady income, individuals with a bumpy credit history, “flippers” looking to renovate a property and quickly resell it, or recent college graduates with large amounts of debt are some typical private mortgage borrowers.
Lenders and borrowers should be aware of the risks of private mortgages. Lenders always run the risk of borrowers defaulting on their loans, especially borrowers who do not have a proven credit history.
And although the property secures the loan, the foreclosure sale may not produce enough money to cover the cost of the loan.
Borrowers may struggle with higher interest rates and shorter payback periods. Or family members may think they can miss a payment or two without consequences.
And the shorter time frame between default and the foreclosure sale makes it more difficult for Borrowers to “catch up” on any missed payments.
What Happens if I Don’t Use a Deed of Trust Form?
Borrowers may stop making payments on their loans for many reasons – they lose their job, go bankrupt, have unexpected medical bills, splurge on a big weekend in Las Vegas, or make a calculated decision not to pay, to name a few.
Without a deed of trust, a lender is left in a bad situation if the borrower stops making payments.
In this case, the lender has no recourse against the borrower and must go to court and stand in line with other creditors to receive any money.
Here is a chart of some of the headaches this agreement might prevent:
| Lender | Borrower |
|---|---|
| Large sums of borrowed money unpaid | Inability to receive financing |
| Non-priority debtor | Increased debt on property or house |
| Expensive lawyer fees to: -recover damage to property or house -battle alleged ownership -pursue debt collection | Expensive lawyer fees to: -defend use of property or house -obtain the deed to property or a house -fight debt collectors |
| Loss of business relationship or family trust | Loss of business relationship or family trust |
| Personal safety and well being | Personal safety and well being |
How to Write a Deed of Trust?
Step 1 – Date of Deed of Trust
Write the date of the Deed of Trust.
Step 2 – Enter Parties’ Information
Provide the full name and address of the lender, borrower, trustee, and co-signer (if applicable), the parties signing the agreement.
Then indicate if the parties are individuals or entities. If any of the parties are entities, include the type of entity and the state of incorporation or formation.
Step 3 – Write the Loan Amount
Write the principal amount of the loan and the interest that the lender is loaning the borrower.
Step 4 – Fill In Loan Details
Indicate if a loan agreement, promissory note, or other document evidences the loan. Also, indicate if there is a guarantor for the loan.
Step 5 – Property Description
Describe the property that is the subject of the loan and includes as much detail as possible to identify the property accurately. Include the property address and legal description.
Step 6 – Enter Financing Details
Provide details regarding payment of principal and interest, partial payments, prepayments, application of payments, and funds for escrow items.
Step 7 – Note Borrower Representations and Warranties
Select the representations and warranties the borrower will make under this deed of trust. Write in any other representations and warranties not already provided.
Step 8 – Enter Other Deed of Trust Details
Include details regarding maintenance and repair, property sale, sale of the note, events of default, acceleration, power of sale, and joint and several liabilities.
Step 9 – Write Miscellaneous Provisions
Provide for miscellaneous provisions such as property insurance, mortgage insurance, inspections, notices, and applicable law.
Step 10 – Obtain Signatures
All parties will sign the deed of trust and have their signatures acknowledged by a notary public.
Deed of Trust Sample
Below you can find what a deed of trust typically looks like:
