What Is a Deed of Trust & How Does It Work in Real Estate?

Are you considering buying a house and looking into your best options for financing? You might wonder, “What is a deed of trust?”

Keep reading to discover everything you need to know about a deed of trust, including why it’s important and when you should opt for one over a mortgage. Whether you’re looking to cash-out refinance in Texas or wondering what size property you can afford, Champions Mortgage has all the information you need.

What Is a Deed of Trust?

A deed of trust functions like a mortgage and acts as a legal document guaranteeing a real estate transaction. A deed of trust agreement involves three parties:

Beneficiary: The beneficiary is the lender whose investment the deed protects.
Trustee: The trustee in the deed of trust agreement is the third party holding the title while the beneficiary makes the payments. They cannot do anything that benefits either party.
Trustor: The trustor is the one borrowing money to purchase the property.

A deed of trust must include specific information, such as the loan amount, a property description, the legal name of all parties involved, the start and end date of the loan, any associated fees, the mortgage default policy, and property ownership rights.

How Is a Deed of Trust Different From a Mortgage?

While a deed of trust and mortgages are both forms of real estate financing, they have nuanced differences.

Number of Parties

The most obvious difference between the two documents is the number of parties involved. While a mortgage is an agreement solely between the lender and borrower, a deed of trust also uses a neutral party to help protect the interests of both the lender and borrower.

Availability

While the majority of states use mortgages as the standard contract for secured loans and real estate financing, the following jurisdictions only use deeds of trust:

Alabama
Alaska
Arizona
Arkansas
California
Colorado
District of Columbia
Georgia

Kentucky, South Dakota, and Maryland allow people to use both.

Default Policy

The other major difference between the two documents is the default and foreclosure process. A deed of trust usually doesn’t involve the courts, whereas a mortgage must go through the legal system to seek restitution. This also means foreclosing on a mortgaged home takes longer, while defaulting on a deed of trust is significantly faster.

In a deed of trust, the trustee usually holds the title in escrow and handles most of the foreclosure process.

The Importance of a Deed of Trust

To better understand “What is a deed of trust?” you should know its benefits and why it’s important. A deed of trust benefits the lender more than the buyer but offers the following benefits for either party.

More Affordable Payments

In many cases, you can help dictate the terms of the deed of trust and make payments based on your other debts and how much you can afford to pay each month. Mortgages give buyers significantly less control over their payments.

Forgiveness After a Fixed Term

The standard term for a deed of trust is only four years, while mortgages typically last between 15 and 30 years. At the end of the term, the lender writes off and forgives any remaining debt you haven’t paid, meaning you may not pay the full loan amount.

However, don’t use this as an excuse to miss a payment. As the borrower, you have less protection than a mortgage, so make the payments you agreed to. It’s essential to plan for unforeseen circumstances and understand what happens if you can’t pay your mortgage, seeking assistance or exploring available options in advance to avoid potential financial challenges. Any forgiven debt after the end of the term is a perk.

Legal Protection Against Creditors

After you sign a deed of trust, creditors can’t come after you for your other debts. Neither can they seize your property while you’re making payments. If you’re having trouble paying your mortgage, consider whether you can refinance using a deed of trust.

Static Payment

Whereas a variable rate mortgage allows lenders to increase your interest rates, a deed of trust prevents the lender from changing your payments in any way. If you’re worried about interest rates, a deed of sale might provide you the peace of mind you need against higher payments before the term of the mortgage ends.

Expedited Foreclosure

The biggest benefit for the lender is the easier foreclosure process. Because they don’t have to go through the courts, the process is faster and more affordable. What does the foreclosure process look like under a deed of trust?

The beneficiary sends a notice of default via certified mail. The notice states how much money the borrower is late paying and the date by which they must pay to avoid foreclosure.
If the borrower doesn’t pay the late installment within 90 days, the process continues. If they pay, the process stops unless you miss another payment.
The lender sends the borrower a notice of sale, which tells the public the house is available for purchase. In most states, the lender must wait at least 21 days to sell the house.
On the date of sale, the lender sells the home, usually through a public auction.

When To Choose a Deed of Trust

If you think now is the right time to buy a house, consider whether you should use a deed of trust or a traditional mortgage. Depending on your state, it might not matter, but you could benefit from a deed of trust if you have a stable income and can commit to regular payments. If you’re at risk of missing any payments, you have more protection under a mortgage.

Reliable Mortgage Lenders

So, what is a deed of trust? It’s a legal document that works like a mortgage but offers more protections to the lender and potentially more affordable payments to the borrower. Whether you’re buying a house for the first time or looking for your forever home, Champions Mortgage helps you through every step of the real estate financing process.

Are you considering buying a house? Call Champions Mortgage at (281) 727-2500 for personalized home lending services today!