Should You Create a Deed of Trust for Your Mortgage? Here's What You Need To Know
Know how a Deed of Trust works to securely fast-track the home-buying process
Are you thinking about getting a mortgage? Before you start the never-ending paperwork to get one, there's another legal strategy for obtaining a home loan — the Deed of Trust. Knowing how a deed of trust works can help fast-track the home-buying process.
A deed of trust document is a secure and valuable legal tool to help you obtain a real estate loan. Below is a quick guide that explains the elements of a deed of trust, the process for securing one, how it's different from a mortgage, and answers to common questions.
What is a Deed of Trust?
A deed of trust is a security device used to create a lien on real property as collateral for a loan by transferring the real property to a neutral third party or Trustee – who will hold on to the property's legal title until the loan is fully paid.
A deed of trust involves the following three parties:
1. The “Trustor” or Borrower
With the property placed in a Trust, the borrower maintains equitable title as long as they make timely and consistent loan payments.
2. The “Beneficiary” or Lender.
The Deed of Trust serves to secure their investment.
3. The “Trustee” or the Third Party
They are responsible for holding the legal title to the real property for as long as the borrower makes timely loan payments. The Trustee protects the interests of both the lender and borrower. They must maintain objectivity and refrain from taking any action that will benefit the Trustor or the Beneficiary. They must maintain objectivity and refrain from taking any action that will help the Trustor or the Beneficiary.
How does a Deed of Trust work?
For instance, in a standard home loan, the home buyer is the borrower, the bank is the lender, and the title business is the Trustee. The borrower transfers the real property to a third-party trustee, and the borrower makes monthly payments to the bank. The Trustee may take action if the borrower fails to meet the loan's payment terms.
Usually, the Trustee is a title company. In most states, the borrower transfers the legal title to the Trustee, who places the property in a trust to protect the lender's or Beneficiary's investment.
Why is a Deed of Trust necessary?
If you’re trying to secure a loan to purchase property, you need to execute a mortgage. However, in some states like California, it’s through a Deed of Trust. A Deed of Trust also works as an alternative to a mortgage when a traditional bank hesitates to lend you the money. Either way, both agreements guarantee the payment of loans.
Deed of Trust vs Mortgage
Two parties are involved in a mortgage – the lender and the borrower. In a deed of trust, however, there is an impartial third party or the Trustee for added security. Both agreements guarantee that a borrower pays the loan.
The distinction between a deed of trust and a mortgage is how it handles defaults on payments. In a traditional mortgage, the lender is responsible for initiating the court process of foreclosing the property if a borrower fails to pay the loan on time. In contrast, a deed of trust is subject to nonjudicial foreclosure, enabling lenders to seize property without obtaining a court judgment.
Deed of Trust vs Promissory Note
A promissory note is a separate document from a deed of trust that essentially "promises" to pay the loan back. It includes information about the loan's specifics and conditions, such as payment terms, interest rates, and borrower-signed payment commitments signed by the borrower.
Deed of Trust vs Title
"Deed of Trust" and "Title" are intertwined when purchasing property, and it's essential to tell the difference because each has a different purpose and meaning. A deed of trust expresses guaranteed payment on the loan on the property, while a title states the actual ownership of a property.
Deed of Trust vs Warranty Deed
As you know, a deed of trust protects the lender and the borrower by putting the property on hold in a "trust" pending full payment. A warranty deed, however, defends the buyer by ensuring that the seller has clear title to the property, no outstanding liens or mortgages, and no future claims to the property's title. Most lenders require a warranty deed from the seller for properties they finance.
Upon full payment, the warranty deed should give the buyer peace of mind that they own the property outright and the title is finally in their name.
How long will a Deed of Trust last?
The maturity date of a mortgage and a deed of trust is when the loan is paid in full. When the borrower completes the scheduled payments per the agreement, they will be the new legal property owner who holds the title.
Let us help you create a Deed of Trust.
Buying property is exciting though it can be a potentially stressful experience without the right partner to help you navigate the many requirements of successful ownership. We will walk you through every stage of the home-buying process, whether you're getting a mortgage, using a Deed of Trust, or paying off an existing loan on your home.