A deed of trust, also called a trust deed, is a document that represents a real estate purchase where there is a loan involved. Many people who have a deed of trust simply refer to it as their mortgage or their home loan, but having a deed of trust is technically a little bit different. Most home loans in the U.S. will include a deed of trust. For the most part, use of a trust deed is based on state regulations. In states where it is required, a deed of trust will be one of the documents buyers sign at closing to make the purchase official and to finalize the loan.
The deed of trust brings a third party into the loan process. First is the buyer, also called a Trustor. Second is the bank or lender, referred to as a Beneficiary on the deed of trust. And the third party that comes into play with this document is the Trustee. They are in charge of holding the title to the property and essentially making sure that the rules of engagement around payment, default and foreclosure are followed for the life of the loan, according to the paperwork signed in that transaction. So, the Trustee is like a protective, non-biased referee in the event that there are issues with the loan or payments.
Very often, when a home is purchased, buyers think of that property as being owned by the bank or lender until they have finished paying back the loan. However, in many states, it is actually the trustee that holds the title and both the buyer and the lender are subject to an official set of rules that were agreed to at the time of purchase. This process helps to protect a buyer from predatory lending. However, it can also allow the lender to move much faster toward foreclosure if payments are not made and the buyer defaults.
To avoid confusion, there are several types of trust deed and related terms explained below as it is important to understand the difference when these terms come up in a transaction.
This document will be presented at closing when a loan is involved and it serves a promise to pay, as the name implies. Usually, when a deed of trust is issued there is also a promissory note involved. The deed of trust establishes that a third party will hold and protect the property deed but it does not include the promise to pay. That is why buyers sometimes feel like they are signing multiple loan documents. They are, each for a specific and separate reason.
This document will show a property owner giving ownership to another party, usually a buyer, where there is no loan involved in the transaction. In this case, the buyer officially becomes the owner at signing. There is no third party involved because there is no lender. Usually, this means the buyer paid cash.
This kind of document is a little bit different in that it represents the completion of a deed of trust. When a buyer finishes paying on their loan, a reconveyance deed will be issued and the trustee will give the deed (proof of actual ownership of the property) to the buyer, with their name showing as the official owner of the property.
When any of these documents are signed, each is then recorded by the county land office where the property is located. This is part of why title companies are involved in the closing process, to help manage these important filings and to help make sure the property is officially owned at the time of sale by the selling person or company. It is easy to see how the official ownership can get confusing without official filings in place.