A deed of trust is a legal document that secures a real estate loan with property. It usually involves three parties: the borrower, the lender and a third-party trustee. The deed of trust gives the lender a security interest in the property. When the borrower repays the loan, that interest is released. If the borrower defaults, the lender may use the deed of trust and applicable state law to pursue foreclosure.
A deed of trust is also called a trust deed or security instrument. Many U.S. states use deeds of trust instead of mortgages, but the legal effect and foreclosure process depend on state law.
Deed of Trust at a Glance
| Item | Explanation |
|---|---|
| Purpose | Secures a real estate loan with the property |
| Parties | Borrower, lender and trustee |
| Borrower's promise to repay | Set out in the promissory note |
| Lender's protection | The right to enforce its security interest if the borrower defaults |
| Trustee's role | Holds or administers the security interest and may handle reconveyance or foreclosure |
| After payoff | The deed of trust is released, often through a reconveyance or satisfaction document |
| Also called | Trust deed, mortgage security instrument or security instrument |
Who Are the Three Parties to a Deed of Trust?
A deed of trust generally involves three parties:
- Trustor or grantor: The borrower who owns or is buying the property.
- Beneficiary: The lender that provided the loan.
- Trustee: A third party, often a title company or another authorized entity, that holds or administers the security interest for the lender's benefit.
The names can vary by state. The lender may be called the beneficiary, while the borrower may be called the trustor or grantor.
Is a Deed of Trust the Same as a Deed?
No. A deed of trust does not transfer ownership from the seller to the buyer.
A standard property deed transfers ownership to the buyer. A deed of trust is a separate financing document that makes the property collateral for the buyer's loan. At closing, the buyer may sign a deed-related document, a promissory note and a mortgage or deed of trust.
The promissory note contains the borrower's promise to repay the debt, including the loan amount, interest rate and repayment terms. The deed of trust connects that debt to the real estate and protects the lender's interest in the property.
How Does a Deed of Trust Work?
A typical transaction follows these steps:
- The borrower signs a promissory note. The note creates the borrower's personal obligation to repay the loan.
- The borrower signs the deed of trust. This gives the lender a security interest in the property.
- The deed of trust is recorded. Recording gives public notice of the lender's interest.
- The borrower makes payments. The borrower normally keeps possession of and uses the property while making the required payments.
- The security interest is released after payoff. Once the debt is satisfied, the trustee or lender usually records a reconveyance, release or satisfaction document, depending on state procedures.
The deed of trust may also contain requirements related to property taxes, homeowners insurance, maintenance, occupancy, ownership transfers and events of default.
What Happens if the Borrower Defaults?
If the borrower misses payments or violates another important loan obligation, the lender may be able to begin foreclosure. A deed of trust often includes a power-of-sale clause. Where state law permits, that clause can allow the trustee to conduct a foreclosure sale without first obtaining a court judgment.
A missed payment does not automatically make the lender the owner of the property. The lender and trustee must follow the applicable notice, cure and foreclosure requirements. Those requirements vary by state and by the terms of the deed of trust.
After a foreclosure sale, the proceeds are usually applied according to state law and the loan documents. State law also controls issues involving surplus funds, remaining debt and deficiency judgments.
Deed of Trust Versus Mortgage
A deed of trust and a mortgage serve the same basic purpose: both secure a real estate loan with the property. The main structural difference is the number of parties involved.
| Feature | Deed of Trust | Mortgage |
|---|---|---|
| Number of parties | Usually three: borrower, lender and trustee | Usually two: borrower and lender |
| Third-party trustee | Yes | Usually no |
| Borrower's debt | Established by a promissory note | Established by a promissory note |
| Property as collateral | Yes | Yes |
| Foreclosure | May use a trustee sale or another process if authorized by state law | May use judicial or nonjudicial procedures, depending on state law |
| Terminology | Trustor, beneficiary and trustee | Mortgagor and mortgagee |
The practical difference is the trustee's role and the foreclosure process available under state law. A deed of trust does not give a lender the same rights in every state. State statutes and the loan documents control the process.
Does the Borrower Own the Property With a Deed of Trust?
Usually, the borrower owns and occupies the property, but the property remains subject to the lender's recorded security interest until the loan is paid off or released.
The treatment of title varies by jurisdiction. In some states, the trustee is treated as holding legal title or a title interest for security purposes. In others, the deed of trust operates mainly as a lien. State law and the recorded documents determine the borrower's rights and the lender's enforcement rights.
What Should You Check in a Deed of Trust?
Review the deed of trust with the promissory note and Closing Disclosure before signing. Check:
- The borrower's legal name
- The lender or beneficiary's identity
- The trustee's identity and contact information
- The property's legal description
- The loan amount and reference to the promissory note
- Requirements for property taxes and insurance
- Occupancy and property-maintenance obligations
- Restrictions on transferring or selling the property
- Events that constitute default
- Notice and foreclosure provisions
- The procedure for releasing the deed of trust after payoff
The Consumer Financial Protection Bureau recommends reviewing the promissory note and the mortgage or deed of trust as part of the closing documents before signing.
Bottom Line
Keep a copy of the recorded deed of trust and confirm that the lender or trustee records the required release or reconveyance after payoff. If you receive a foreclosure notice, have a payoff problem or cannot obtain a reconveyance, get advice based on the law of the state where the property is located.