When you’re closing on a home, there can be a lot of paperwork. You might wonder what, exactly, you’re signing and how it all works.
Often, one of the documents you’ll sign is a deed of trust. This critical document signifies an agreement between you and your bank, so it’s essential to understand what it means and how it works.
A deed of trust form is a real estate document you might encounter at the end of the home buying process. It represents an agreement between the home buyer and the home loan lender.
In this deed, the buyer agrees that the lender will hold the legal title of the property until the buyer repays the loan.
If that sounds similar to a mortgage, it is. Some states offer deeds of trust instead of mortgages when financing is involved in a home purchase.
Deed of Trust by State
A deed of trust involves three parties:
- Trustor (borrower)
- Trustee (independent and neutral third party)
- Beneficiary (lender)
The trustor or borrower is usually the person buying the home, and the beneficiary is usually a bank.
The trustee is typically a title or escrow company. They’ll hold the legal title on the property until the borrower repays the loan.
If the borrower fails to make their loan payments, the trustee initiates the foreclosure process, ensures the lender receives payment, and then dissolves the trust.
In the aforementioned deed, the borrower or home buyer gives the bank a promissory note. Promissory notes are a written promise to repay the loan. They state the terms of the loan, including the interest rate and loan length.
When the buyer pays off the loan, the promissory note is marked “paid in full” and returns to the buyer. If the buyer fails to pay off the loan or meet the loan terms, the trustee or escrow company will initiate the foreclosure process.
Deeds of trust typically contain a power-of-sale clause that allows the trustee to issue a non-judicial foreclosure.
Non-judicial foreclosures are heavily regulated and usually require lenders to provide special notice to the property owner. They may also specify a certain amount of time before the trustee can put the property up for auction. But they don’t require the trustee to go through the court system.
Because they don’t involve the courts, non-judicial foreclosures happen much faster than traditional foreclosures. This makes his type of deed tthe favorable option for many banks and lenders.
A deed of trust ensures that borrowers will repay their loan; otherwise, they forfeit their property. Depending on where you’re purchasing property, you may need this deed to proceed.
Some states require this deed when buyers use financing to purchase a home. Other states rely on mortgages to serve the same purpose. There are also several states that accept both.
Even in states that will accept either a deed of trust or a mortgage, many lenders may only offer financing with a deed of trust. That’s because deeds of trust feature a streamlined foreclosure process if the homebuyer defaults on their loan.
Deeds of trust and mortgages fulfill the same purpose. Both provide a path for banks to pursue foreclosure. State laws also regulate them both.
However, trust deeds and mortgages differ in two significant ways:
Mortgages have two parties; the lender and the borrower. Trust deeds have three; the lender, the borrower, and a neutral third party, usually an escrow company.
Mortgages don’t include non-judicial foreclosures. If a borrower defaults on their loan, the bank must pursue them through the court system. Going through the court system takes more of the lender’s resources and makes the foreclosure process longer than it is with a deed of trust.
Enacting a deed of trust involves collecting information for the deed form, executing the agreement, and recording the deed form with the appropriate government office.
Many online law services offer a free deed of trust or deed of trust template that you can use if you choose not to use one of the attached templates. Or, you may choose to use a real estate lawyer for this process.
The first step in any process for this specific deed is to gather and fill in the information needed on the deed form. Deed of trust forms usually require:
- Names and addresses of all parties
- Legal description of the property
- Main terms of repayment
You can obtain thelegal description of the property by contacting your county registrar or the county recorder of deeds. They’ll ask for the property address and tax parcel number. With that information, they can quickly look up the property’s legal description.
Alternatively, you may be able to find the legal description on a tax assessment document or land title document. Or, if you’re working with a real estate attorney, you can ask them for help attaining the legal description.
The main terms of repayment summarize the terms listed on the promissory note. They’ll include the principal amount owed, interest rate, and how the interest calculates (monthly or annually). Sometimes they’ll also include additional loan terms.
Once the form is complete, all of the parties will sign and date the agreement in the presence of a notary. Some states require one witness during the signing and will count the notary as that witness.
Others require two witnesses. The notary can be one of them; the other one needs to be a disinterested party who’s at least eighteen years old.
Your state may or may not require you to record your deed of trust within a specific time, but whether it’s a requirement or not, you should record the agreement right away. Recording protects the home buyer from adverse title claims by other parties.
Usually, trust deeds are recorded at the County Recorder’s or County Clerk’s office, and each county sets its own filing requirements. Most counties post these requirements online, or you can call them for more information.
Once all of the involved parties complete and sign the deed, then record it with the local county, the document is functional.
Deeds of trust can seem complicated, and you might still have questions. Below are some of the most common questions (and answers) surrounding deeds of trust.
When closing on a home, you may come across a deed of trust. This essential document gives the bank a path to foreclosure on your property should you default on your loan. It also lays out the loan terms, so it’s essential to understand how this deed works before you sign the document.