What is a Deed of Trust?
There are many ways to secure a loan, and a deed of trust is among them. When borrowing money one may enter a repayment scheme with the lender that include liens on property, encumbrances on future earnings, or by posting collateral.
A deed of trust is a method of posting collateral against a loan, specifically offering title to property in exchange for the funding. In this scenario, a trustee is named to hold the title to the collateral, usually taking the title for the duration of the note. Depending on the terms of the contract, the trustee may be bound to return the title to its original owner when the loan is paid, to turn the title over to the lender if the loan repayments fail to meet the terms of the agreement or to sell the property held a turn the proceeds over to the lender.
When a deed of trust agreement is entered, documentation is sent to the county recorder or other appropriate officials as notification that the property has been encumbered. Prior to purchasing property it is crucial to examine such documents to ensure that liens and encumbrances have been removed, allowing a clear title to the property.
The promissory note that establishes a deed of trust arrangement generally includes a power of sale clause allowing the trustee or lender to foreclose on the property for nonpayment of the loan without an extensive legal process. Mortgages are usually written to be more friendly to the borrower, offering a “judicial foreclosure” process if payments fall short.
This document is an example of the structure of a deed of trust agreement would follow.
Where are Deeds of Trust Common?
States establish the legality of such instruments individually. For instance, some states define who is allowed to be a trustee while others do not allow deeds of trust because properties are bought and sold using mortgages. In Texas individuals named as public trustees may handle such transactions.
In states that use mortgages rather than deeds of trust, title companies assume the role of trustees between a mortgage company and the property buyer.
In states that rely more on deeds of trust than mortgages, the “deed of trust” is synonymous with the title to a property. This article discusses the pros and cons of holding such a title jointly, including that a court may seize the property if one owner defaults on debts.
Investors may buy deeds of trust – essentially loaning money in exchange for a return on investment in the form of payment premiums plus interest.