What Is A Deed Of Trust In Real Estate?
A deed of trust is a type of secured real estate transaction. It is used in specific states in lieu of a mortgage, as the Legal Information Institute detailed. The deed of trust may also be called a trust deed, as Investopedia explained. Generally, a traditional deed of trust will include three parties to the transaction. Those parties include a lender, a borrower, and a trustee.
As the name implies, the lender is the party who provides (lends) access to money for the borrower. As part of this real estate exchange, the borrower generally provides at least one promissory note (via Legal Information Institute). A promissory note is a debt instrument that contains a written promise by one party to pay another party a definite amount of money. This note may be satisfied either on demand or at a specific future date. An example of a deed of trust is linked here, as proffered by a governmental finance source.
How a deed of trust works
To provide a form of security for the promissory note, the borrower will typically transfer some form of a real property interest to a certain third party. This third party is known as a trustee. Because the trustee has a special relationship, per his duties, he is allowed to gate-keep in a sense. If the borrower defaults on his loan terms, then the trustee is allowed to assume control of the real property interest in order to remedy the borrower's default, as per the Legal Information Institute.
For a majority of U.S. jurisdictions, the borrower will transfer legal title to a trustee. In many instances, a trustee will be a title company. Because the trustee is a fiduciary she has certain responsibilities in connection with her professional duties. Pointedly, the trustee will hold the property in trust for the use and benefit of the borrower. In most U.S. jurisdictions though, the trustee will hold a lien on the property.
Where deeds of trust are used
Overall, while the United States of America is one nation, the country is also home to dozens of states and a few island territories with their own laws and requirements. As a result of this national sprawl, and some differences in legal requirements in different U.S. states and territories, in some of these jurisdictions, deeds of trust can be in fairly common usage. As specific examples, deeds of trust are often used in states including Alaska, Arizona, California, Colorado, Idaho, Illinois, Mississippi, Missouri, Montana, North Carolina, Tennessee, Texas, Virginia and West Virginia, as Investopedia reported.
At the same time, and given jurisdictional differences, in certain other states mortgages are considered preferable. In a minority of states, both mortgage documents and deeds of trust are used for real estate transactions. The minority of U.S. states, which use a hybrid approach includes Kentucky, Maryland, and South Dakota.