Trust Deed

Property ownership is central to the success of hard money loans. When a borrower takes out a hard money loan, they use their property as collateral. If everything goes according to plan, they’ll retain ownership of their property after repaying the loan. If they default, they’ll permanently lose ownership.

In order for this process to function, lenders use a legal document known as a trust deed. Read on to learn what this document is and the role it plays in hard money loans.

What Is a Trust Deed?

A trust deed, or deed of trust, is a legal document used to transfer ownership of a property to a trustee. It’s most commonly needed when a property is used as collateral for a loan. In these transactions, a trustee takes over ownership of the property throughout the duration of the loan. If the loan is repaid, the borrower recoups ownership of their property. If they default on the loan, the trustee can sell the property and pay the loan back to the lender.

How Does a Trust Deed Relate to Hard Money Loans?

Hard money loans are always secured by hard assets like real estate, rather than a borrower’s creditworthiness. Trust deeds are central to the hard money loan process. These deeds of ownership ensure that, if a borrower defaults on their loan, their lender can legally take over ownership of the property and foreclose to recoup their losses.

How a Trust Deed Works

A trust deed is designed to protect both the lender and the borrower in a hard money loan. Read on to learn how the process works.

The Trust Deed Process: Step-by-Step

Interested in a hard money loan secured by real estate? Here’s what to expect:

Step 1: Title transferred

First, a deed of trust is drafted. The borrower signs the deed, officially transferring the title to the trustee.

Step 2: Equitable title issued

The borrower is then issued an equitable title, which allows them to use and possess their property throughout the duration of the loan.

Step 3: Property lien placed

The lender then places a voluntary lien on the property.

Step 4: If the loan is repaid

If the borrower successfully repays their loan according to its terms, the trustee releases the title and the lien is removed.

Step 5: If the loan goes into default

If the borrower fails to repay their loan, the lender can foreclose on the home. The trustee sells the property and uses the proceeds to repay back the loan.

Real‑World Scenarios

Gain a deeper understanding of the function of trust deeds in hard money loans from these real-world scenarios

Probate Loan Repaid

A beneficiary is slated to inherit a property from a recently passed relative. They need access to funds and plan to sell the property, but it’s currently stuck in probate. Rather than waiting until probate is over, they take out a hard money loan using the property as collateral.

A trust deed for the property is issued to a trustee. The beneficiary gets access to their funds. Six months later, probate ends and the property sells. The beneficiary uses the proceeds to pay back the hard money loan. The title is returned to the beneficiary.

Fix-and-Flip Default

An investor takes out a $500,000 hard money loan to purchase a fix and flip property, using an existing real estate holding as collateral. A deed of trust is issued to a third-party trustee for the duration of the loan.

The investor successfully renovates the property, but cannot find a buyer. They default on their loan. Their hard money lender places the collateral property in foreclosure. The trustee retains the deed of trust and places the property on the market. The property sells for $1 million. The trustee pays back the loan, interest, and fees to the lender, then returns the remaining proceeds of the sale to the investor.

Trust Deed FAQs

What is the difference between a trust deed and a mortgage?

A mortgage is issued in traditional lending and is an agreement between two parties: lender and borrower. A trust deed, on the other hand, is used in hard money lending when a loan is secured by property. This agreement is between three parties: a borrower, a lender, and a trustee.

While both documents enable borrowers to foreclose on real estate, it is much easier to foreclose when a trust deed is in place than it is with a mortgage.

Who is the trustee in a trust deed?

The trustee is a neutral third party unrelated to either the borrower or the lender. In most cases, a title company, escrow company, or attorney acts as a trustee in hard money loans.

How does a trust deed get removed from a property?

When a loan is successfully repaid, the trustee files a Deed of Reconveyance, which transfers ownership of the property back to the borrower. This document removes the trust deed and releases the lien on the property.

What rights do I have as a borrower under a trust deed?

Although the trustee holds ownership of the property, the borrower can still occupy and use the property thanks to a document known as an equitable title. This document states that, as long as the loan is repaid as planned, the borrower has the right to eventually own the property.

Is a trust deed the same as the title to the property?

A trust deed is not the same as a title. It is a document that transfers the title to the trustee on a temporary basis for the duration of the loan. The borrower retains the title throughout the loan, though they don’t have first claim to it.

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