A Deed of Trust or a Declaration of Trust is a binding agreement between a borrower, a lender and a third-party person or company who will act as a Trustee. The deed of trust is usually to secure real estate transactions where a loan from the lender is needed to purchase the property. A deed of trust is like a mortgage but in some areas is used instead of the traditional mortgage.
Simply stated, a lender gives money to the borrower for a home purchase or any real estate. The borrower then provides a promissory note that is a guarantee that the loan will be paid. A Trustee is entrusted the title of the lot during the loan period.
Why is a Deed of Trust needed?
Some states in the US do not honour mortgages. The deed of trust is an alternative. The deed of trust can also be used when a bank or lender cannot provide the amount of the loan needed. Whether it is a mortgage or a deed of trust, both guarantees the payment of the loan to the lender.
Parties involved in this type of agreement
There are three parties that play a part when a deed of trust is made:
- Beneficiary or lender
- Trustor or borrower
- Third-party Trustee (can be an individual or a company)
The Beneficiary of a Deed of Trust is the Lender. The deed of trust serves as protection of interest of the beneficiary.
The Borrower or Trustor has the legal title of the property, but during the loan duration it shall be put into a trust. The borrower can gain equity from the property if they consistently make payments on the loan. For example, if the property will be leased out, the rental shall go to the Borrower.
The Trustee will hold the title on the property as long as the borrower still owes money. Trustees must remain impartial and should not do anything unfair to any of the parties.
What are the other responsibilities of a Trustee?
The Trustee holds the legal title to the property in the event the loan against it is not repaid in full. Trustees often have the following responsibilities:
- If the property is sold before the loan is paid off, the Trustee will use the sale proceeds to pay the remaining balance of the loan. The borrower is then paid from any of the remaining proceeds.
- When the loan is fully paid, the Trustee is responsible for dissolving the trust and transferring the legal title to the borrower.
Difference between a Mortgage vs Deed of Trust
The similarity between the two agreements lies in the fact that both guarantees that a borrower will pay the loan at a specific number of remittances or on a particular date. The main difference is that a mortgage will only have two parties involve, the lender and the borrower. The deed of trust has one more party who is the Trustee.
Another difference is how defaults of payments are handled. For traditional mortgages, if the borrower can no longer pay the loan, the lender has the responsibility to initiate the foreclosure process. This is handled in court. On deed of trust process, this goes through non-judicial foreclosure.
There are other differences worth mentioning:
- Mortgages are used in all states of the US.
- Deed of Trust are available only in some states.
- Mortgages provide both lender and borrower equal interest on the property until the loan is fully paid.
- The deed of trust gives legal title on the property to the Trustee until the loan is fully paid.
How long will the Deed of Trust last?
The deed of trust has a maturity date that provides when the loan should be fully paid. The borrower should make scheduled payments per agreement and pay the full amount on due date. The borrower can then get the title from the Trustee.
