With a deed of trust, a lender loans money to a borrower to purchase a home or other property. As security against the loan, the borrower gives legal title to the property to the lender.

Table of Contents

• What is a Deed of Trust?
• Deed of Trust vs. Mortgage
• What Should I Include in a Deed of Trust?
• When Do I Need a Deed of Trust Form?
• Why not just get a loan from the bank?
• What Happens if I Don’t Use a Deed of Trust Form?
• How to Write a Deed of Trust?
• FAQs
• What is a Deed of Trust?
• How does a Deed of Trust differ from a Mortgage?
• What is the role of the trustee in a Deed of Trust?
• What is a "power of sale" clause in a Deed of Trust?
• Deed of Trust Sample

What is a Deed of Trust?

A Deed of Trust, often used in real estate transactions, is a legal document that establishes a security interest in real property. It serves a similar purpose to a mortgage but involves three parties: the borrower (trustor), the lender (beneficiary), and a neutral third party known as the trustee. This document is commonly used in some U.S. states, while others use mortgages to achieve the same purpose. Here are the key components and functions of a Deed of Trust:

1. Trustor: The trustor is the borrower or property owner who is seeking financing for a real estate transaction, such as buying a home. The trustor conveys legal title and ownership of the property to the trustee but retains equitable ownership and the right to use and possess the property.

2. Beneficiary: The beneficiary is the lender or financial institution providing the loan to the trustor. The beneficiary holds a security interest in the property as collateral for the loan. If the trustor defaults on the loan, the beneficiary has the right to initiate foreclosure proceedings to recover the loan amount by selling the property.

3. Trustee: The trustee is a neutral third party, often a title company or a trustee services company, responsible for holding the legal title to the property until the loan is paid off or the terms of the Deed of Trust are met. The trustee's primary role is to facilitate the transfer of the property to the beneficiary in the event of default. They do not have an active role in the loan agreement but act as a custodian of the property's legal title.

4. Promissory Note: In addition to the Deed of Trust, the trustor typically signs a promissory note, which is a separate document outlining the terms of the loan, including the loan amount, interest rate, repayment schedule, and other terms and conditions. The promissory note represents the trustor's obligation to repay the loan.

5. Power of Sale Clause: Deeds of Trust often contain a "power of sale" clause, which grants the trustee the authority to sell the property through a non-judicial foreclosure process in the event of a default. This allows the lender to recover the outstanding debt without going through a lengthy court process.

6. Recording: Deeds of Trust are typically recorded with the county or local land records office where the property is located. The recording provides notice to the public of the lender's security interest in the property and protects the lender's rights in the event of a dispute or subsequent sale of the property.

It's important to note that the use of a Deed of Trust or a mortgage can vary by state and may be subject to local laws and regulations. The specific terms and procedures associated with Deeds of Trust can also vary, so both borrowers and lenders should consult with legal professionals who are knowledgeable about real estate and lending laws in their jurisdiction.

Deed of Trust vs. Mortgage

A Deed of Trust and a Mortgage are both legal instruments used in real estate transactions to secure a loan, but they differ in key ways. Here are the main distinctions between a Deed of Trust and a Mortgage:

1. Parties Involved:

• Deed of Trust:
  • In a Deed of Trust, there are three parties involved: the borrower (trustor), the lender (beneficiary), and a neutral third party called the trustee. The trustee holds legal title to the property until the loan is paid off or the terms are met.

• Mortgage:
  • In a Mortgage, there are two parties involved: the borrower (mortgagor) and the lender (mortgagee). The borrower retains both legal and equitable title to the property.

2. Role of the Trustee:

• Deed of Trust:
  • The trustee in a Deed of Trust is a neutral third party responsible for holding legal title to the property as security for the loan. The trustee's primary role is to facilitate the transfer of the property to the lender (beneficiary) in the event of default.

• Mortgage:
  • In a Mortgage, there is no trustee. The lender (mortgagee) holds a lien on the property but does not hold legal title. Legal title remains with the borrower (mortgagor) until the mortgage is paid off.

3. Foreclosure Process:

• Deed of Trust:
  • Deeds of Trust typically include a "power of sale" clause, allowing the trustee to initiate a non-judicial foreclosure process in the event of default. The trustee can sell the property without going through the court system, following specific procedures outlined in the Deed of Trust.

• Mortgage:
  • Mortgage foreclosure usually requires a judicial process involving the court system. The lender (mortgagee) must file a lawsuit and obtain a court order to foreclose on the property.

4. Title Transfer:

• Deed of Trust:
  • Legal title to the property is temporarily transferred to the trustee while the loan is active. The borrower retains equitable ownership and the right to use and possess the property.

• Mortgage:
  • In a Mortgage, the borrower retains both legal and equitable title to the property. The lender holds a lien on the property until the mortgage is satisfied.

5. Geographic Variation:

• Deed of Trust:
  • Deeds of Trust are commonly used in some U.S. states, such as California, Texas, and Arizona, and less frequently in others. They are favored in states where non-judicial foreclosure is a common practice.

• Mortgage:
  • Mortgages are more commonly used in states that follow judicial foreclosure procedures.

Both Deeds of Trust and Mortgages serve as security instruments, allowing lenders to foreclose on the property in the event of a borrower's default. The choice between these instruments often depends on state laws and local practices, and borrowers should be aware of the legal framework in their specific jurisdiction when entering into a real estate transaction. Additionally, borrowers should consult with legal professionals and lenders to understand the implications of their choice.

What Should I Include in a Deed of Trust?

A Deed of Trust is a complex legal document that should be prepared with care and typically involves the expertise of real estate professionals and legal counsel. The specific contents of a Deed of Trust can vary by jurisdiction and the requirements of the parties involved, but here are some common elements that are typically included:

1. Identification of Parties:
   • The full legal names and addresses of all parties involved should be clearly stated. This includes the borrower (trustor), lender (beneficiary), and trustee.

2. Legal Description of the Property:
   • A precise legal description of the property being used as collateral should be included. This typically includes the property's address, parcel number, and a detailed legal description from a previous deed.

3. Recording Information:
   • Information regarding the recording of the Deed of Trust with the appropriate government office should be specified, including the county and state where it will be recorded.

4. Loan Amount and Terms:
   • The principal amount of the loan should be stated, along with the interest rate, the term of the loan, and the payment schedule. Any provisions for adjustable interest rates or balloon payments should be included.

5. Security Interest:
   • The Deed of Trust should clearly state that the property is being used as security for the loan, and it should specify the conditions under which the property can be sold to satisfy the debt.

6. Power of Sale Clause:
   • If applicable, a "power of sale" clause should be included. This clause grants the trustee the authority to sell the property through a non-judicial foreclosure process in the event of default.

7. Covenant to Pay Debt:
   • The borrower should acknowledge the debt and agree to repay it according to the terms outlined in the document.

8. Release and Reconveyance Provisions:
   • Provisions should be included detailing the process for releasing the Deed of Trust and reconveying the property to the borrower once the loan is paid off.

9. Insurance and Taxes:
   • Provisions regarding the borrower's responsibility for maintaining insurance on the property and paying property taxes should be included.

10. Default and Remedies:
    • The document should outline the specific events that constitute a default and the remedies available to the lender in the event of default, such as foreclosure.

11. Attorney's Fees and Costs:
    • Provisions regarding the payment of attorney's fees and other costs associated with enforcement of the Deed of Trust should be addressed.

12. Governing Law and Jurisdiction:
    • The choice of law governing the Deed of Trust and the jurisdiction for any legal disputes should be stated.

13. Signatures and Notarization:
    • All parties involved should sign the Deed of Trust, and their signatures should be notarized to ensure the document's authenticity.

14. Acknowledgment and Acceptance by Trustee:
    • The trustee's acknowledgment of their responsibilities should be included, as well as their acceptance of the role.

15. Legal Provisions and Riders:
    • Depending on the jurisdiction and specific requirements, additional legal provisions or riders may need to be added to the Deed of Trust.

Given the complexity and legal implications of Deeds of Trust, it is advisable to consult with a real estate attorney or other qualified professionals who can ensure that the document complies with state and local laws and serves the interests of all parties involved. The specifics of a Deed of Trust may also depend on state laws and regulations, so local legal counsel should be consulted for guidance.

When Do I Need a Deed of Trust Form?

You typically need a Deed of Trust form in the following situations:

1. Real Estate Financing: A Deed of Trust is commonly used in real estate transactions when financing is involved. It is often used as a security instrument to secure a loan or mortgage. If you are borrowing money to purchase or refinance a property, the lender may require a Deed of Trust to protect their interest in the property.

2. Mortgage Loan: In some states, a Deed of Trust is used instead of a mortgage to secure a home loan. If you are obtaining a mortgage loan in a state that uses Deeds of Trust, you will need this form.

3. Home Equity Loan or Line of Credit: When borrowing against the equity in your home through a home equity loan or home equity line of credit (HELOC), a Deed of Trust may be used as collateral to secure the loan.

4. Owner Financing: In situations where a property seller is providing financing to the buyer (seller financing), a Deed of Trust can be used to secure the seller's interest in the property until the buyer fulfills the terms of the financing agreement.

5. Loan Modifications: If you are modifying the terms of an existing mortgage or loan, a Deed of Trust may be used to reflect the changes and update the terms of the security interest.

6. Refinancing: When refinancing an existing mortgage, a new Deed of Trust may be required by the new lender to secure the refinance loan.

7. Home Equity Conversion Mortgage (HECM): Borrowers obtaining a reverse mortgage (HECM) on their property may be required to sign a Deed of Trust as part of the loan process.

8. Property Investment Financing: Real estate investors who are obtaining financing for investment properties may use Deeds of Trust to secure their loans.

9. Contract for Deed: In some arrangements, such as a contract for deed or land contract, a Deed of Trust may be used to secure the seller's interest until the buyer completes the payments and fulfills the contract.

10. Other Financing Arrangements: There are various financing scenarios in real estate, and a Deed of Trust may be used in any situation where a lender or creditor wants to secure their interest in real property.

It's important to note that the use of a Deed of Trust or a mortgage may vary depending on state laws and practices. The specific requirements, forms, and legal procedures can differ from one jurisdiction to another. Therefore, it's advisable to consult with a real estate attorney or other qualified professionals who are familiar with the laws and practices in your area when dealing with real estate transactions involving Deeds of Trust.

Why not just get a loan from the bank?

Getting a loan from a bank is a common way to secure financing for various purposes, including buying a home or funding a business. However, there are situations where individuals or businesses may explore alternatives to traditional bank loans, such as obtaining financing from other sources or using specialized financial instruments like Deeds of Trust. Here are some reasons why someone might consider alternatives to bank loans:

1. Creditworthiness: Banks typically have strict credit requirements, and individuals or businesses with less-than-perfect credit may have difficulty qualifying for bank loans. In such cases, alternative financing options, such as private lenders or owner financing, may be more accessible.

2. Speed of Approval: Bank loan approval processes can be time-consuming, involving extensive paperwork, credit checks, and underwriting. For urgent financing needs, individuals or businesses may seek faster approval through alternative sources.

3. Unique Financing Needs: Some financing needs may not align with traditional bank loan offerings. For example, individuals buying a property through seller financing may use a Deed of Trust as part of the transaction, as it provides flexibility in structuring the financing terms.

4. Real Estate Transactions: Deeds of Trust are commonly used in real estate transactions, particularly in states where they are the preferred security instrument for home loans. In such cases, individuals may not have the option of obtaining a bank mortgage due to local practices.

5. Owner Financing: In some cases, property sellers may offer owner financing as an alternative to traditional bank loans. Buyers and sellers may use a Deed of Trust to secure the seller's interest in the property while the buyer makes installment payments.

6. Investment Financing: Real estate investors and businesses looking to secure financing for investment properties may explore alternative sources, including private lenders, hard money loans, or crowdfunding platforms, to fund their ventures.

7. Unique Terms: Alternative financing sources may offer more flexible terms, interest rates, and repayment schedules compared to traditional banks. Borrowers may find terms that better suit their specific financial situation or investment strategy.

8. Complex Transactions: In complex financial transactions, such as certain real estate deals or business acquisitions, multiple parties and legal instruments may be involved. Deeds of Trust can be used to structure these transactions according to the needs of all parties.

9. Bank Loan Denial: In cases where a bank denies a loan application, borrowers may explore other financing options to meet their needs.

It's important to note that while alternative financing options can provide flexibility and accessibility, they may also come with their own risks and considerations. Borrowers should carefully evaluate the terms, interest rates, and repayment requirements of any financing arrangement and seek legal and financial advice as needed to make informed decisions. Additionally, local laws and regulations can impact the availability and use of alternative financing methods, so it's essential to understand the legal requirements in your area.

What Happens if I Don’t Use a Deed of Trust Form?

Borrowers may stop making payments on their loans for many reasons – they lose their job, go bankrupt, have unexpected medical bills, splurge on a big weekend in Las Vegas, or make a calculated decision not to pay, to name a few.

Without a deed of trust, a lender is left in a bad situation if the borrower stops making payments.

In this case, the lender has no recourse against the borrower and must go to court and stand in line with other creditors to receive any money.

Here is a chart of some of the headaches this agreement might prevent:

Lender	Borrower
Large sums of borrowed money unpaid	Inability to receive financing
Non-priority debtor	Increased debt on property or house
Expensive lawyer fees to:-recover damage to property or house-battle alleged ownership-pursue debt collection	Expensive lawyer fees to:-defend the use of property or house obtain the deed to the property or a house debt collectors
Loss of business relationship or family trust	Loss of business relationship or family trust
Personal safety and well-being	Personal safety and well-being

How to Write a Deed of Trust?

Writing a Deed of Trust is a complex legal process that typically requires the expertise of a real estate attorney or a qualified legal professional. Deeds of Trust involve intricate legal language and must adhere to specific state and local laws. Attempting to write one without legal knowledge could lead to errors and complications. However, if you are seeking a general understanding of what a Deed of Trust might entail, here are the basic steps and components involved:

1. Consult with Legal Counsel:

• Before attempting to write a Deed of Trust, consult with an experienced real estate attorney who can provide guidance, ensure compliance with local laws, and customize the document to your specific needs.

2. Identify the Parties:

• Clearly identify all parties involved, including the borrower (trustor), lender (beneficiary), and trustee. Include their full legal names, addresses, and other relevant contact information.

3. Describe the Property:

• Provide a detailed legal description of the property being used as collateral. This should include the property's address, parcel number, and a comprehensive legal description from a previous deed.

4. Specify Loan Details:

• Outline the terms of the loan, including:
  • The principal loan amount.
  • The interest rate.
  • The term of the loan.
  • The repayment schedule (e.g., monthly, annually).
  • Any provisions for adjustable interest rates or balloon payments.

5. Declare the Security Interest:

• Clearly state that the property is being used as security for the loan, and specify the conditions under which the property can be sold to satisfy the debt.

6. Include a Power of Sale Clause:

• If applicable and permitted by local laws, include a "power of sale" clause, which grants the trustee the authority to sell the property through a non-judicial foreclosure process in the event of default.

7. Define Default and Remedies:

• Clearly define what constitutes a default under the Deed of Trust and outline the remedies available to the lender in the event of default, such as foreclosure.

8. Address Insurance and Taxes:

• Specify the borrower's responsibility for maintaining insurance on the property and paying property taxes.

9. Include Legal Provisions:

• Include any necessary legal provisions and clauses, which may vary depending on local laws and regulations.

10. Establish Governing Law:

• Define the choice of law governing the Deed of Trust and the jurisdiction for any legal disputes.

11. Notarize and Execute:

• Ensure that all parties involved sign the Deed of Trust, and have their signatures notarized to authenticate the document.

12. Record the Deed of Trust:

• File the Deed of Trust with the appropriate government office in the county or jurisdiction where the property is located. Recording provides notice to the public of the lender's security interest in the property.

Again, it's crucial to emphasize that writing a Deed of Trust is a legal undertaking that should be handled by a qualified attorney or legal professional. The document must comply with local laws and adhere to the specific needs and requirements of the parties involved.

FAQs

What is a Deed of Trust?

A Deed of Trust is a legal document used in real estate transactions to secure a loan. It involves three parties: the borrower (trustor), the lender (beneficiary), and a neutral third party known as the trustee. The trustee holds legal title to the property as security for the loan.

How does a Deed of Trust differ from a Mortgage?

While both serve as security instruments for real estate loans, Deeds of Trust involve three parties (borrower, lender, and trustee), whereas mortgages involve two parties (borrower and lender). Deeds of Trust often allow for non-judicial foreclosure, while mortgage foreclosures typically require court involvement.

What is the role of the trustee in a Deed of Trust?

The trustee is a neutral third party responsible for holding legal title to the property until the loan is paid off or the terms are met. In the event of default, the trustee has the authority to sell the property on behalf of the lender (beneficiary).

What is a "power of sale" clause in a Deed of Trust?

A "power of sale" clause grants the trustee the authority to sell the property through a non-judicial foreclosure process in the event of default. This allows the lender to recover the outstanding debt without going through a court proceeding.

Deed of Trust Sample