Trust Deed

Trust Deed (Deed of Trust)

A trust deed, also known as a deed of trust, is a legal document that transfers title of a property to a third-party trustee, who holds it as security for a loan (debt) between a borrower and lender. The trust deed remains in effect until the loan is paid in full. It includes three key parties:

Trustor: The borrower.
Trustee: The third party who holds the title.
Beneficiary: The lender.

This instrument serves similar purposes as a traditional mortgage but involves an additional party, the trustee, to handle title issues.

Examples

Home Purchase: When an individual buys a home using a trust deed, they transfer the title of the property to a trustee, such as a title company, while the lender funds the home purchase. The trustee holds the title until the loan is repaid.
Refinancing: A homeowner with a current mortgage may use a trust deed when refinancing their home, transferring the title to a trustee who holds it until the new loan is paid off.
Commercial Real Estate: A business might use a trust deed in securing financing for commercial property. The property title is placed in trust, ensuring the lender’s interest is protected until the loan is fully repaid.

Frequently Asked Questions

Q: How does a trust deed differ from a mortgage? A: A trust deed involves three parties – the trustor, trustee, and beneficiary – and the title is conditional based on loan repayment. A mortgage involves only the borrower and lender and generally conducts foreclosure through court proceedings.

Q: What happens when a borrower defaults on a loan secured by a trust deed? A: In the event of a default, the trustee typically has the power to sell the property through a non-judicial foreclosure process to repay the loan, often faster than judicial foreclosure required in traditional mortgages.

Q: Are trust deeds legal in all states? A: No, trust deeds are not used in all states; they are most commonly used in states like California, Idaho, and Texas. Other states may rely exclusively on traditional mortgages.

Q: What rights does the trustee have under a trust deed? A: The trustee holds the title to the property in trust, managing it according to the terms laid out in the trust deed, which includes actions like initiating the foreclosure process if the borrower defaults.

Q: When is a trust deed typically reconveyed? A: A trust deed is generally reconveyed when the loan is fully paid off, returning the title to the trustor/borrower.

Mortgage: A two-party instrument used to secure the repayment of a loan, involving the borrower (mortgagor) and lender (mortgagee).
Foreclosure: The legal process by which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments, ultimately leading to the sale of the secured property.
Trustor: The borrower in a trust deed arrangement who grants the property title to the trustee as security for the loan.
Trustee: A neutral third party in a trust deed arrangement who holds the title on behalf of the lender until the loan is paid off or defaults on payment.
Beneficiary: The lender in a trust deed arrangement for whose benefit the title is held until the loan is repaid.

Online Resources

References

“Real Estate Finance and Investments” by William B. Brueggeman and Jeffrey D. Fisher
“Principles of Real Estate Practice” by Stephen Mettling and David Cusic
“The Language of Real Estate” by John W. Reilly

Suggested Books for Further Studies

“Real Estate Finance: Publications can explain the broader framework, including trust deeds.”
“California Real Estate Law: Particularly useful where trust deeds are the primary instrument.”
*“Understanding California Real Estate Law”: by D. Patrick Hubbard, William Hume, Judy Spryszak

Real Estate Basics: Trust Deed Fundamentals Quiz

### Which parties are involved in a trust deed? - [ ] Only the borrower and the lender. - [x] The trustor, trustee, and beneficiary. - [ ] The borrower and the seller. - [ ] Lender and legal adviser. > **Explanation:** A trust deed involves three key parties: the borrower (trustor), the neutral third-party (trustee), and the lender (beneficiary). ### Who holds the title to the property in a trust deed arrangement? - [ ] The borrower. - [x] The trustee. - [ ] The beneficiary. - [ ] The state. > **Explanation:** In a trust deed arrangement, the trustee holds the title to the property until the loan is repaid. ### What typically happens when a borrower defaults on a loan secured by a trust deed? - [x] The trustee may sell the property through a non-judicial foreclosure process. - [ ] The loan is automatically forgiven. - [ ] The state takes possession of the property. - [ ] The lender must go to court to initiate foreclosure proceedings. > **Explanation:** When a borrower defaults, the trustee has the power to sell the property through a non-judicial foreclosure process. ### In which states are trust deeds most commonly used? - [ ] New York and New Jersey - [x] California, Idaho, and Texas - [ ] Florida and Georgia - [ ] Ohio and Michigan > **Explanation:** Trust deeds are most commonly utilized in states like California, Idaho, and Texas. ### What action is taken when a loan secured by a trust deed is paid off? - [x] The trust deed is reconveyed, and the title is returned to the borrower. - [ ] The trustee acquires ownership of the property. - [ ] The loan is extended by default. - [ ] The lender retains a stake in the property. > **Explanation:** Once the loan is paid off, the trust deed is reconveyed, and the title is returned to the trustor (borrower). ### Which party benefits from the title held in a trust deed arrangement? - [x] The lender (beneficiary). - [ ] The trustee. - [ ] The state. - [ ] The original seller. > **Explanation:** The lender (beneficiary) benefits from the title held in trust, ensuring their security interest is protected until the loan is repaid. ### What is another term commonly used for trust deed? - [ ] Mortgage - [x] Deed of Trust - [ ] Promissory Note - [ ] Land Contract > **Explanation:** A trust deed is also commonly referred to as a Deed of Trust. ### How does foreclosure differ between a mortgage and a trust deed? - [x] A trust deed typically utilizes non-judicial foreclosure, while a mortgage uses judicial foreclosure. - [ ] Both use the exact same foreclosure process. - [ ] Mortgages foreclose faster than trust deeds. - [ ] Trust deeds have no provision for foreclosure. > **Explanation:** Foreclosure under a trust deed generally involves a non-judicial process, which is typically faster compared to the judicial foreclosure process required for mortgages. ### What condition is necessary for a property to be held under a trust deed? - [ ] The property is jointly owned. - [ ] The property is tax-exempt. - [x] The property is used as collateral for a loan. - [ ] The property is held for rental purposes only. > **Explanation:** A trust deed holds the property as collateral for a loan between the borrower and the lender. ### Who reconveys a trust deed when it is satisfied? - [ ] The borrower. - [x] The trustee. - [ ] The lender. - [ ] An appointee of the state. > **Explanation:** The trustee is responsible for reconveying the trust deed and returning the title to the borrower once the loan is paid off.