What is a Deed of Trust?

Published by Thomas Herold in Banking, Laws & Regulations, Real Estate

'Deed of Trust' is explained in detail and with examples in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

A Deed of Trust refers to a critically important document which is associated with purchasing a house. Coupled with the promissory note, these are arguably the two most important documents which get signed in a closing on a home. The deed of trust proves to be the loan security. It is similarly the one which becomes recorded with public records in the local area governing jurisdiction. This deed can be numerous pages long.

There are three component parties to the deed of trust. The trustor is ultimately the borrower. The beneficiary proves to be the lender on the deal. The trustee is that third party entity that maintains the ownership of the title throughout the terms of the loan. These instruments will identify many important terms to the mortgage and the loan arrangements. Among these is the principal amount of the loan, the names of the various parties, and the property’s legal description which ultimately secures the mortgage. It also details the mortgage requirements and provisions, the loan’ s maturity date and inception date, the legal proceedings, and the late fees associated with the account. Finally, the deed will cover alienation and acceleration clauses along with riders that pertain to clauses such as adjustable rate mortgages and prepayment penalties that may apply.

It is critically important to understand who or what the trustee is on a given mortgage. Mortgages themselves do not come with a trustee. Yet the deeds of trust do. This must always be a neutral third party which neither represents the interests of neither the lender nor the borrower. It would often be an entity or organization like the title company. Such a group will maintain the rights known as the “Power of Sale” should the borrower default. Once the deed has been paid off fully, the trustee will reconvey the property. The trustee has the duty to file the Notice of Default should the borrower default. Generally though, such a trustee will bring in another trustee to arrange the foreclosure terms in what is called a Substitution of Trustee.

In either case, following 90 day periods while the public records are updated and the subsequent 21 day publication in the major area circulating newspaper, the trustee has the rights to sell the property directly from the steps of the courthouse without undergoing standard court proceedings. Up to this point, the borrower could reclaim the property by catching up on all missed back payments and covering the fees the trustee has assumed to that point. After a trustee sells the property in the Trustee Sale, this is considered to be binding and final.

The promissory note should never be confused with the Deed of Trust. The deed secures both the debt and the property. The promissory note is further secured by the deed itself. This comprises the debt’s evidence of existence. Besides this, the promissory note represents the borrower’s promise to repay the mortgage debt. It will contain all applicable terms like payment obligations and interest rates. Though it is not usually recorded, this note will be stamped “paid in full” and given back to the appropriate borrower with the recorded Reconveyance Deed. It is the lender who holds the promissory note up to the point when the borrower fully repays the loan. Borrowers do receive copies of these important documents.

With Deeds of Trust and Promissory Notes, borrowers should thoroughly read both documents before signing them. It is critically essential to review a number of items covered by both documents. These include the all-important loan balance principal, the trustors’ names spelling, the interest rate, the amount of monthly payments, address of the property in question, and any prepayment penalties associate with the mortgage itself.

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The term 'Deed of Trust' is included in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.