A deed of trust may be one of the many legal documents you come across when you are buying or selling a house. But, of all those legal documents, it’s used for specific situations.
First, it’s important to understand what a deed of trust is. A deed of trust is a legal agreement between the lender, buyer and a neutral third party called the trustee. The trustee (like an attorney, for example) holds the legal title of the house until the borrower pays back all its debts to the lender.
If the borrower does not pay the lender back within the scope of the agreement, the third party has a right to sell the house and return the funds to the lender. Although the third party holds the legal title to the house, the borrower is usually still responsible for the premises until their ownership is removed.
Once all conditions in the legal agreement between the lender and borrower are met, the legal title is officially transferred from the third party to the borrower.
How to get a deed of trust
Some states require a deed of trust while others accept a mortgage. From the perspective of the lender, a deed of trust can be more beneficial than a mortgage. If the borrower defaults on their loan, the third party is responsible for the sale and distributing any proceeds of the sale to the lender, rather than moving forward with standard legal proceedings that could take place in the event a borrower defaults on their loan payments.
If you live in a state that welcomes deeds of trust and mortgages, it is ultimately up to the lender to decide how to proceed.
How does a deed of trust work?
- The buyer provides a promissory note to the lender. The promissory note contains the agreement to pay back the debt to the lender, interest rates and other details regarding this exchange.
- In return, the lender gives the buyer the deed of trust.
- Once the loan has been paid in full, the neutral third party will transfer the deed and therefore the legal ownership to the buyer of the house.
- If the borrower defaults on the loan, the third-party handles the foreclosure of the house or, in some instances, passes it off to a different trustee.
Who benefits from a deed of trust?
Ultimately, the lender benefits from a deed of trust in the event of foreclosure. This is because the trustee is responsible for carrying out the foreclosure process and distributing any proceeds of the sale of the property to the lender. Like a mortgage, with a Deed of Trust the buyer can also benefit if the trustee sells the house and there are profits beyond what they need to pay back to the lender.
See if a deed of trust is right for you
A deed of trust is a safe option for a lender and may be required in certain states. If you have additional questions about a Deed of Trust, reach out to your Home Lending Advisor to find out more.