Deed of Trust

A deed of trust is a legal agreement that’s used in real estate transactions in some instances. While a deed of trust is similar to a mortgage, there are some key differences. Discover what a deed of trust is, the role it plays for real estate investors, and how it’s different from a mortgage.

A deed of trust is a type of legal agreement used in real estate transactions. With a deed of trust, the lender finances the purchase and allows the borrower to purchase a property. The property title is then transferred to a third party called a trustee — typically a title company or escrow company — who holds on to the title until the loan has been fully repaid.Once your loan has been paid off, the trustee will transfer the title for the home to you. 

One important thing to keep in mind is that deeds of trust aren’t used in every state. Deeds of trust are legally recognized in 33 states, and there are a handful of states where you can use either a deed of trust or a mortgage.

Unlike a mortgage which requires a court-ordered judicial foreclosure process, deeds of trust allow for a non-judicial foreclosure process. This is something to consider when you’re deciding what type of loan you want to apply for.

In some states, mortgages are your only option when it comes to securing a traditional home loan. However, many states legally recognize deeds of trust and even allow you to choose between a deed of trust and a mortgage.

In states where deeds of trust are legally recognized, they’re commonly used for hard money loans. The trustee takes legal possession of the property while you’re paying off your hard money loan, then the title is transferred to you when you’re done paying off the loan.

If you’ve never used a deed of trust to purchase real estate, the concept may be a bit confusing. Deeds of trust are similar to mortgages, but there are some big differences that you should consider when you’re deciding what kind of loan to apply for.

In many ways, a deed of trust essentially serves the same purpose as a traditional mortgage. With a deed of trust, the trustee holds the title to the property you purchase until you’ve paid off your loan in full. This trustee is usually a title company or escrow company. Once your loan has been paid off, you’ll receive the title.

With a traditional mortgage, you hold the title to your home as soon as you purchase the property. Instead of having a third-party trustee take control of the title until the loan is paid off, your lender will put a lien on the property that they can use as collateral if you default on your loan.

When you default on a traditional mortgage, you usually have to go through a judicial foreclosure process. A judicial foreclosure process typically offers more legal protection for investors, which can make mortgages a better option for some people.

When you default on a deed of trust, there’s a good chance the foreclosure process will be non-judicial. This means you don’t have the same legal protection, and non-judicial foreclosures are usually processed quicker than judicial foreclosures.

Ultimately, it’s up to you to decide which type of loan is right for you. Choosing the right type of loan also involves researching your state laws regarding mortgages and deeds of trust.

Most people are familiar with mortgages, but that doesn’t mean you know how a deed of trust works in the real world. In this section, we’ll look at some real-world scenarios involving deeds of trust.

In this example, we’ll look at a first-time homebuyer in Arizona — where both mortgages and deeds of trust are legally recognized. If you’re in one of these states where both options are available, the lender will decide which to use. If you prefer one option over the other, you can discuss that with your lender before you apply for a loan.

If you secure a loan with a deed of trust, your property title will be in the possession of a third party until the loan is paid off. You can continue making monthly payments for the duration of your loan agreement. Once you make your last monthly payment, the title will be transferred from the trustee to you — and you’re no longer responsible for that loan.

In the event of a foreclosure, the lender can decide whether to use a judicial or non-judicial foreclosure process.

Before you decide between a mortgage and deed of trust, check out some of the pros and cons to help make the right decision.

A deed of trust can be a wise option if you have a regular source of income that allows you to make your monthly payments on time. In some cases, you may be required to use a deed of trust to secure a mortgage.

If the borrower defaults on the loan, lenders can use a quicker, non-judicial foreclosure process that offers less legal protection for borrowers.