In real estate transactions, a deed of trust, also known as a trust deed, plays a vital role, particularly in financed real estate deals, serving as an alternative to traditional mortgages. This legal document transfers the property’s title to a third party, such as a bank, escrow company, or title company, to be held as security until the borrower fulfills their debt obligation to the lender.
How Deeds of Trust Work
When individuals seek financing to purchase real estate, deeds of trust come into play. Here’s how it works: a lender provides funds to the borrower in exchange for promissory notes tied to a deed of trust.
The deed of trust conveys the property’s legal title to a neutral trustee, typically a title company, an escrow company, or a bank. This trustee holds the title as collateral for the promissory notes, while the borrower retains equitable title and full use of the property throughout the loan repayment period.
Throughout the loan term, the trustee maintains legal title until the borrower satisfies the debt, at which point ownership transfers back to the borrower. In case of default, the trustee assumes control of the property.
Deed of Trust vs. Mortgage
Contrary to common perception, a mortgage and a deed of trust serve distinct purposes in real estate transactions, with the latter involving an additional party. Both instruments create liens on properties to secure loans.
One key difference lies in the parties involved: mortgages entail a borrower and a lender, while deed of trusts incorporate a third party— the trustee, responsible for holding the property’s title on behalf of the lender.
Moreover, the foreclosure processes for mortgages and trust deeds differ significantly. With a mortgage, a judicial foreclosure is pursued through court proceedings, whereas a deed of trust allows for a nonjudicial foreclosure, a quicker and less expensive route with predetermined procedures outlined in the trust deed and state laws.
In the event of default, a mortgage necessitates a court-supervised foreclosure process, while a deed of trust offers a more streamlined nonjudicial foreclosure method.
The Bottom Line
In conclusion, a deed of trust serves as a pivotal document in real estate transactions, ensuring security for lenders and borrowers alike. Understanding the nuances between a deed of trust and a mortgage can empower individuals to make informed decisions when engaging in real estate financing.