What is a Deed of Trust?
A trust deed, sometimes known as a deed of trust, is a type of real estate contract used in the United States. It’s a legal document that comes into play when one party borrows money from another to buy a house. The trust deed is a contract between a borrower and a lender that the property will be kept in trust by a neutral and impartial third party until the loan is paid off.
Despite the fact that trust deeds are less frequent than they once were, 20 states still require the use of one instead of a mortgage when financing the acquisition of real estate. Alaska, Arizona, California, Colorado, Idaho, Illinois, Mississippi, Missouri, Montana, North Carolina, Tennessee, Texas, Virginia, and West Virginia are among the states that use trust deeds. Only a few states, including Kentucky, Maryland, and South Dakota, allow both trust deeds and mortgages to be used.
Deed of Trust Definition
A deed of trust, sometimes known as a trust deed, is a legal instrument used to create a security interest in real property in the United States. It transfers legal title to a trustee, who retains it as security for a loan (debt) between a borrower and a lender. The borrower retains the equitable title. The lender is referred to as the beneficiary, while the borrower is referred to as the trustor.
How do Deeds of Trust work?
A lender offers the borrower money in exchange for one or more promissory notes attached to a trust deed in a real estate transaction, such as the purchase of a property. This deed gives an impartial trustee, such as a title company, escrow business, or bank, legal ownership to the real property, which is held as collateral for the promissory notes. The borrower retains equitable title—the right to achieve complete ownership—as well as full usage and accountability for the property.
This state of things persists throughout the loan’s repayment tenure. Until the borrower pays the debt in full, the trustee controls the legal title to the property, which then passes to the borrower. The trustee takes complete possession of the property if the borrower fails on the debt.
Difference between a Deed of Trust and a Mortgage
Both trust deeds and mortgages are used to create liens on real estate in bank and private loans, and both are usually registered as debt in the county where the property is located.
A mortgage, on the other hand, involves two parties: the borrower (or mortgagor) and the lender (or mortgagee). A trust deed, on the other hand, is made up of three parties: the borrower (or trustor), the lender (or beneficiary), and the trustee. If the borrower defaults, the trustee will start and finish the foreclosure procedure at the lender’s request.
Deed of Trust Summary
In funded real estate transactions, trust deeds give a third party—such as a bank, escrow business, or title company—legal ownership to a property to retain until the borrower repays the lender. In certain states, trust deeds are utilized instead of mortgages. Investing in trust deeds can give a steady stream of income.
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Financial Consultant and Author