When it comes to buying and owning a home, whether in real life or as experienced in books, movies, or on TV, we often hear about the process in the context of a mortgage — getting approved for one, having to make those mortgage payments, and so on. But rarely do we hear anyone discussing a deed of trust.
In general, the term “mortgage” is used to describe any loan that is secured by real property. But when you are comparing the use of a deed of trust to the use of a mortgage, it’s essential to understand that we are not talking about real estate loans in the general sense, but instead are referring to the specific documents used to formalize those loans.
A mortgage or deed of trust, in this context, is the “security instrument” or contract that is used to define the terms under which a loan on real property is secured by that real property. (Got that?)
More than half of the United States either can use, or exclusively uses, deeds of trust as the security instrument for securing a loan, with the remaining states tending to rely on the mortgage as the standard security instrument.
So, let’s explore what a deed of trust is, where it may be used, and how it differs from the mortgage security instrument. Here to help is top agent Tommy Williams, whose 16 years of experience selling homes in the Atlanta area have made him a firsthand expert on deeds of trust.
What is a deed of trust?
OK, so we’ve established that both a mortgage and a deed of trust are “security instruments.” But what is a security instrument?
A security instrument is a document that ties the repayment of a promissory note (in other words, a loan) to a piece of property (or other specified collateral) and expressly outlines who legally owns said property (or collateral) while the buyer is making loan payments, as well as what happens if the buyer stops making those payments.
A mortgage security instrument involves at least two parties — the lender (typically a bank) and the borrower, with the lender being the lienholder and beneficiary. If the borrower stops making mortgage payments, the lender has legal recourse available to reclaim the title to the property and recoup its losses through the court system.
With a deed of trust, meanwhile, a third party (or trustee) holds the legal title to the property until the borrower has satisfied their loan payments. This trustee is typically a title company, and failure to make mortgage payments can result in what’s generally referred to as a non-judicial foreclosure.
In other words, in the deed of trust context, the lender can move forward with foreclosure without having to go through the court system. This is because the trustee is considered a neutral party with no sway over the value of the home to favor either the borrower or the lender.
This doesn’t mean a borrower can lose a home overnight, however. Most states require a formal notice period to give the borrower a chance to get back in good standing.
For example, “the loan default [in Georgia] has to be in the public notice for 60 days, which gives the borrower at least 60 days to catch up or to work out some type of agreement with the lender,” says Williams.
Furthermore, with a deed-of-trust foreclosure, the lender only receives the amount still owed to them on the home loan. Any proceeds over and above the outstanding amount due are returned to the borrower — which is definitely not the case with the judicial foreclosure process following a standard mortgage.
What does a deed of trust include?
The actual document will contain all the pertinent information on the property and the loan terms, including:
- The address and a description of the property
- The loan amount
- The borrower’s name, lender’s name, and trustee’s name
- The loan dates, from when you took out the loan until it will mature
- What happens in the event of default on the loan
- Any fees or other relevant charges
- Any loan riders or contract addenda (which can vary by state)
A deed of trust ensures that all involved parties have a clear understanding of responsibilities and repercussions. The lender has agreed to loan you money to purchase the home, you’ve agreed to pay the lender back over a specified period, and the trustee has agreed to hold the title in trust as a neutral third party.
As the borrower, the equitable title is yours — which means that the right to obtain full ownership of the property is exclusively yours, so as soon as the loan is paid off, the legal title will be released to you from the trustee.
Which states use deeds of trust?
You’ll see deeds of trust in states where non-judicial foreclosure is permitted.
Some states only use deeds of trust, while others may use either mortgage agreements or deeds of trust.
Deed-of-trust states include:
- District of Columbia
- New Hampshire
- New Mexico
- North Carolina
- Rhode Island
- South Dakota
- West Virginia
Because legal matters are always subject to change, if you’re just starting your homebuying journey and you’re not sure where your state falls between deeds of trust and mortgage agreements, you can always ask your real estate agent.
This is also an ideal question for your lender during the loan pre-qualification process, as they’ll always have the most up-to-date information!
Do I have a choice between a mortgage or a deed of trust?
Most often, you won’t really have a choice — this will be dependent upon state regulations and typically up to your lender. Deed of trust or mortgage, the bottom line is basically the same: You’re buying a house with borrowed money, and an agreement is in place to ensure that both parties uphold their end of the deal.
Though being able to avoid the judicial process for foreclosure proceedings is more of a benefit to the lender than the buyer, the straightforward nature of a deed of trust is helpful for everyone involved. Terms are very clear, so you’ll know exactly what you’re signing up for from the start.
And the more transparent the process, the faster everyone can move through the paperwork.
“With a deed of trust, the closing process is more simplified,” according to Williams. “Given that you, the borrower, are already familiar with the documents, closing typically takes about an hour. You’re just going over, in detail, the same documents you completed within your loan application. There are no ‘gotcha’ moments.”
Are there extra costs associated with a deed of trust?
Buyers typically pay between 2% and 5% of the loan amount in closing costs, making them a large out-of-pocket expense when purchasing a home. With a deed of trust, you shouldn’t pay any extra closing costs. You’ll see these fees itemized on the Closing Disclosure a few days prior to closing, so, once again, there are no surprises.
“Deeds of trust are extremely straightforward,” says Williams.
What happens after I’ve paid off my loan?
When the home loan has been paid in full, the deed will be released from trust.
The lender will issue a document to certify that you have sufficiently satisfied your debts — this is often called a deed of reconveyance — and the property title will be released from the trustee and transferred fully over to you as the homeowner.
It’s all quite simple and equates to the same thing as paying off your mortgage in a mortgage state: The home is now yours, free and clear.
What else should I know about deeds of trust?
In short, deeds of trust are not scary or strange! “Mortgage” may be the common terminology, but with 35 states using deeds of trust, these documents are far from rare.
Buying a home in a deed-of-trust state does not change your need to qualify for a home loan, nor does it alter the negotiation process. You’re still making a deal with the seller — hopefully with the aid of an experienced agent — and you’re still the one who will be responsible for making timely payments in accordance with your loan agreement.
The most significant difference between a deed of trust and a mortgage is the lack of judicial process to begin foreclosure. If you’re experiencing financial hardship, you should always get in touch with your lender as soon as possible to explain your situation and discuss your options. Remember, most banks out there don’t want to go through foreclosure any more than you do — if you’re communicative and show a willingness to bring your loan back to a current status, a solution can often be found.
If you have further questions about deeds of trust, don’t hesitate to reach out to a lender or a real estate agent in your city.
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