In California, if you hear someone say they have a mortgage, they probably have a Trust Deed or Deed of Trust. A Deed of Trust is used in California in lieu of a mortgage when financing the purchase of real estate. Whereas a mortgage has only two parties, the mortgagor and mortgagee; a Trust Deed has three parties, a trustor, a trustee and a beneficiary.
First, lets understand the three parties:
1. The beneficiary is the lender–such as a bank.
2. The trustor is the person who buys the home. He or she trusts the trustee with the deed until the loan is repaid
3. The trustee is a neutral third party who holds the deed to the property until the trustor repays the beneficiary. It’s the job of the trustee to carry out the express terms of the trust instrument and be impartial among beneficiaries.
When property is purchased using a Trust Deed the beneficiary (or lender) lends money to the trustor to purchase property. The beneficiary also executes a grant deed giving the property to the trustor. Immediately, the trustor also executes a deed of trust giving the property to a neutral third party trustee until the loan has been repaid. In this situation, the trustee holds “naked title.” This means the trustee holds the title, but does not have possession of the property. The trustor or borrower retains equitable title, meaning they get to occupy and possess the property.
Once the loan is paid in full, the trustor gets full title, ownership and possession of the property.
If a trustor or borrower defaults on the loan, after proper notice and time, the trustee will sell the property at trustee sale to a new owner who will take title using a Trustee’s Deed Upon Sale (TDUS).
If a property sells at trustee sale the proceeds from the sale are dispersed to three parties, in this order:
1. To the trustee to cover their costs associated with the sale and transfer of the property.
2. To the beneficiary or lender to cover their original loan, interest and legal fees.
3. If there are any funds remaining after the beneficiary is repaid those funds revert back to the trustor or borrower.
Are deeds of trust used in all states?
No. Deeds of Trust are mostly used in the financing of real estate purchases in Alaska, Arizona, California, Colorado, District of Columbia, Idaho, Maryland, Mississippi, Missouri, Montana, Nebraska, Nevada, North Carolina, Oregon, Tennessee, Texas, Utah, Virginia, Washington, and West Virginia. Most other states use mortgages.
What’s the difference between a Deed of Trust and a Mortgage?
With a Deed of Trust there are three parties involved, the borrower, the lender, and a trustee, whereas in a mortgage there are only two parties involved, the borrower and the lender.