What Is A Deed Of Trust?

Definition and Purpose

In the US, a Deed of Trust or more commonly, a Trust Deed, serves as evidence of a debt.  It also serves as the transfer record for the title on a piece of property to a third party which holds the deed as security.  In most states it is the most common form of financing a home or piece of property.  Additionally, where public records are concerned, it is the document that serves as the recording of the title.

Typically, the following are identified by a Deed of Trust:

  • Borrower and lender
  • Legal property description
  • Loan amount
  • Loan inception date
  • Loan maturity date

Additionally, there are certain aspects that a Deed of Trust will specify, inclusive of:

  • Acceleration and/or Alienation Clauses (if specified)
  • Adjustable or fixed rates of interest
  • Applicable late fees
  • Penalties for pre-payment (if specified)
  • Provisions for legal procedures and the requirements

Function of a Trust Deed

Despite the fact that most states employ mortgages, some states (e.g. California) prefer to use a Deed of Trust.  This establishes a third party, commonly referred to as a trustee, who holds the title on the property until the loan has been completely repaid.  The three parties concerned are the borrower/purchaser, the lender, and the trustee.  The title company is oftentimes assigned the responsibility of being the trustee.

Their function is to provide security for the lender by holding the Deed of Trust.  Once the loan on the property has been paid in full the Deed of Trust is released by the title company as a Deed of Release.  The title is then transferred into the name of the purchaser and is stamped “Paid in Full.”  It should be noted that the title company is referred to as a silent entity or vehicle which operates independently of the lender and the purchaser.

Considerations prior to signing a Deed of Trust or Promissory Note

Remember first and foremost that any documents involved in any real estate transaction are always filled out and prepared by a human being, meaning that there is a possibility of errors existing.  Everyone involved in the transaction should read over all documents very thoroughly making to certain to review the following items as they are the most important:

  • Correct spelling of all names
  • Loan principal balance
  • Rate of interest (a rider may be included if the rate is adjustable)
  • Amount of monthly payments
  • Clauses specifying pre-payment penalties and the amounts involved
  • Property address

Despite the involvement of the of the third party/trustee, the purchaser still retains the privileges and the rights to the property.  The most significant difference between mortgage notes and a Deed of Trust is the fact that the trustee is allowed to foreclose directly on the property.  In this circumstance, the court is not allowed in the default proceedings.  Finally, as with the importance of the above, make sure that you receive answers to any and all of your questions.