The Definition of a Deed of Trust
Buying real property usually requires a loan, with repayment secured by a document called a mortgage in most states. However, several states, including California, use a document called a deed of trust or trust deed rather than a mortgage. The deed of trust can be used to secure any monetary obligation regardless of whether the money was used to purchase the property. While it is the functional equivalent of a mortgage, a deed of trust differs significantly from a mortgage if the need arises to foreclose on the real property because of a default in repayment of the monetary obligation.
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Three-Party Transaction
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Mortgages involve only a lender and borrower. A trust deed involves three parties: trustor, beneficiary and trustee. Although the trustor is the only party that signs the deed of trust, the document will be ineffective without naming both a beneficiary and trustee.
Trustor
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The trustor is the owner of the real property being used as security to repay a debt. In most cases, the trustor is the person obligated to repay the debt. However, the trustor may provide a deed of trust as security for someone else's obligation, as in the case of providing security for a bail bond that is used to obtain a relative's or friend's release from jail pending trial. The security becomes effective when the trustor signs the trust deed and it is recorded with the county recorder's office, which then makes the deed of trust a lien against the property.
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Beneficiary
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The beneficiary named in the deed of trust is the person or company who has provided a monetary benefit, the repayment of which is being secured by the property. The most common type of beneficiary is a bank or other financial institution that provides a loan to the trustor to purchase the property being used as security to repay the loan. In this situation, the deed of trust will typically include the basic loan terms, such as the principal amount, interest rate, repayment terms and due date.
Trustee
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Where the deed of trust initially differs from a mortgage is in the naming of a trustee in the deed of trust, which must be an individual or company not a party to the loan or other transaction between the trustor and beneficiary. So long as the trustor is not in default of any obligations owed to the beneficiary as specified in the deed of trust, the trustee simply "holds title" to the property until the trustor satisfies the entire obligation, such as repaying the loan in full. In most states, a title company is usually named as trustee, and title companies provide blank form deeds of trust for use with the company's name preprinted in the form as trustee.
Nonjudicial Foreclosure
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The unique aspect about a deed of trust is the availability of the remedy known as a "nonjudicial foreclosure" in the event the trustor defaults in performing any obligation required under the terms of the deed of trust. Once the default occurs, the beneficiary can instruct the trustee to sell the property under the trust deed's "power of sale" provision---i.e., perform a non-judicial foreclosure. Unlike a foreclosure under a mortgage which requires a lawsuit, the deed of trust gives the trustee the power to sell the property without court action. A nonjudicial foreclosure is a desirable remedy because it is less expensive and takes less time than a lawsuit.
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References
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