What Is a Deed of Trust?

A Deed of Trust is a legal document used in real estate transactions to secure a loan between the borrower (trustor), the lender (beneficiary), and a neutral third party (trustee). The borrower transfers the legal title of the property to the trustee, who holds it as collateral until the loan is repaid. 

The Deed of Trust outlines the terms of the loan and protects the lender’s interests. If the borrower fails to make payments, the trustee has the authority to sell the property through a foreclosure process to recover the lender's money.

Is a Deed of Trust the same as a Mortgage?

While both a Deed of Trust and Mortgage are security instruments that pledge real property as collateral for the loan, they are technically not the same. These instruments involve different foreclosure processes and parties.

A Mortgage typically involves two parties — the borrower and the lender — while a Deed of Trust includes a third party, known as a trustee. The trustee is typically a title company, escrow company, or bank. The trustee does not have any personal stake in the loan itself, but is responsible for overseeing its proper execution according to the agreed-upon terms.

Unlike traditional mortgages that are secured by a Mortgage instrument, which follow a judicial foreclosure (court involvement), a Deed of Trust is commonly used to secure home loans in states that follow non-judicial foreclosure processes. In a non-judicial foreclosure, the lender can typically recover the property more quickly and with fewer legal fees.

What’s included in a Deed of Trust?

A Deed of Trust contains critical details about the loan agreement and the property involved. This legal document serves as a safeguard for all parties, ensuring that the loan terms are properly recorded and agreed upon. Below are the key components found in a Deed of Trust:

• The original loan amount
• A description of the property
• Names of all parties involved (lender, borrower, trustee)
• The inception and maturity date of the loan
• Occupancy requirements
• Riders (addendums that provide additional details about the mortgage or property type)
• Fees (such as loan origination and closing costs)
• What happens in case of mortgage default as every state has different foreclosure laws
• Additional clauses depending on the nature of the sale

How does a Deed of Trust work?

A third-party trustee acts as an intermediary, holding the legal title of the property while the borrower makes payments to the lender. On closing day, the borrower signs both a promissory note (agreeing to repay the loan) and the Deed of Trust. The lender funds the loan, and the trustee holds the property title until the loan is fully repaid. 

Unlike the lender or borrower, the trustee remains a neutral party to the transaction, ensuring the terms of the agreement are upheld. If the borrower meets their repayment obligations, the trustee releases the title to them upon full repayment. If the borrower defaults, the trustee facilitates the type of foreclosure as dictated by the Deed of Trust.

What is a Deed of Trust normally used for?

Deeds of Trust are an alternative option to a Mortgage, and are commonly used in the majority of states and the District of Columbia. Meanwhile, as of the date of this article, the following states use a Mortgage as the preferred instrument for real estate transactions: Connecticut, Delaware, Florida, Hawaii, Indiana, Iowa, Kansas, Louisiana, New Jersey, New York, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, Vermont, and Wisconsin. A handful of states recognize both, with the lender deciding which to use.

If you’re unsure whether you live in a Mortgage state or a Deed of Trust state, research real estate or property laws found on government websites, talk with an attorney, or contact your local county recorder’s office. 

What happens when a Deed of Trust is paid off?

Once the borrower pays off the loan, the trustee releases the legal title to the borrower, making them the full owner of the property. This is typically done through a document called a “deed of reconveyance.”

A deed of reconveyance officially transfers the title from the trustee to the borrower, signifying that the debt has been satisfied and the lender no longer has a claim on the property. This deed can serve as proof that you now hold the title free and clear.