Trust deeds, also referred to as deeds of trust or notes, are deeds whereby the legal title of real estate property is transferred to a trustee. This individual holds the deed as a form of security for a loan secured between the borrower and lender. In other words, trust deeds are formal documents that outline terms of a trust agreement and serve as additional security.
With trust deeds, the official property title is maintained by the trustee until the loan on the property is paid in full. Although the trustee is not involved with the agreement between the borrower and lender, this person is responsible holding the note unless the borrower defaults on the loan, at which time the trustee has the legal right to sell the property.
Certain steps are taken in setting up deed trusts, including:
- Real estate purchases are typically structured so the lender provides the borrower with money to buy the property.
- In exchange for paying the seller, the buyer receives a grant deed for the property.
- Immediately, the borrower executes a trust deed whereby the property is given to the trustee to be held in a trust until the loan between the borrower and lender is paid.
An escrow holder is always used when dealing with deeds of trust to ensure the transaction will not close until the funds, grant deed, and trust deed are handed over. With that, the transaction can be rolled back if for any reason one of the parties involved cannot complete his or her end of the deal.
Trust deeds are different from mortgages since the deed always involves a minimum of three parties: the borrower, lender, and trustee. The legal title for a mortgage goes to the mortgage company, whereas for a deed of trust, it goes to the trustee. In both scenarios, the borrower retains the equitable title. While there are distinct differences between mortgages and trust deeds, essentially, they are both security instruments.