A deed of trust is an agreement formed between a buyer of real estate, a lender financing the purchase, and a neutral third party called the trustee. The deed of trust acts as security for the promissory note, which is a form that establishes the borrower’s obligation to pay back the full amount lent.
Should the borrower default on the loan, the trustee (who holds onto the title) will have the right to sell the property in order to clear the default. It’s the addition of the trustee that separates a deed of trust from a mortgage, which traditionally only involves the lender and buyer. Deed of trusts are currently permitted in thirty (30) states.
- New Hampshire
- New Mexico
- North Carolina
- Rhode Island
- South Dakota
- West Virginia
A deed of trust, also known as a “trust deed”, is an agreement in which a lender and a borrower agree to have a trustee hold onto the title until the loan is paid off. The deed of trust acts as collateral/security for the promissory note(s) signed between the parties.
The “trust” part of the deed refers to the fact the legal title to the property is kept by the trustee, who only releases the title to the borrower once the loan is paid for.
While some states have requirements for who can act as a trustee, the trustee is commonly:
- A title insurance company
- An entity (such as an LLC)
- An attorney
- A financial institution (e.g., a savings bank or credit union)
Depending on the agreement between the lender and borrower, both may have the privilege of choosing the trustee together, or the lender may reserve the full right to choose a trustee on their own.
While both deeds of trusts and mortgages are used for lending, they have a few key differences, which include:
- Foreclosure process – With a mortgage, the lender has to file a lawsuit on the homeowner after default occurs. What follows is a long, drawn-out judicial process that can take over a year to resolve (if not more). With a deed of trust, the process is significantly faster (and cheaper), as it only involves the requirements set out in the deed of trust form and the state’s statutes. See the “Power of Sale” clause below for more information.
- Number of parties – Mortgages only involve the borrower and the lender. Deed of trusts, on the other hand, involve the borrower, the lender, and the trustee.
Deed of trust forms contain an essential provision known as the “power of sale” clause. This clause allows the lender to go through a non-judicial foreclosure should the borrower default on the loan. Without the clause, the lender would need to go through court proceedings to take possession of the property, which is standard for mortgage agreements. Whether a state permits power of sale clauses to be used is what determines whether a deed of trust can be used.
The following are the state statutes pertaining to deed of trust and/or power of sale for each state. If a state shows “N/A”, power of sale foreclosures are not offered in the state.
|Alabama||Yes||§ 35-10-11 to 35-10-16|
|Alaska||Yes||§§ 34.20.070 to 34.20.135|
|Arizona||Yes||§§ 33-801 to 33-821|
|Arkansas||Yes||§§ 18-49-101 to 18-49-106, § 18-50-103|
|California||Yes||§§ 2920 – 2944.10|
|Colorado||Yes||Article 38 & Article 39|
|Georgia||Yes||§§ 44-14-120 to 44-14-126, § 44-5-33|
|Hawaii||Yes||§§ 506-1 to 506-10|
|Idaho||Yes||§§ 45-1502 to 45-1515|
|Maryland||Yes||§§ 7-101 to 7-113|
|Massachusetts||Yes||§§ 244:1 to 244:41|
|Michigan||Yes||§§ 600.3201 to 600.3285|
|Minnesota||Yes||§§ 582.01 to 582.32|
|Mississippi||Yes||§ 89-157, § 89-1-63|
|Missouri||Yes||§§ 443.005 to 443.454|
|Montana||Yes||§§ 71-1-201 to 71-1-235|
|Nebraska||Yes||§§ 76-1001 to 76-1018|
|Nevada||Yes||§§ 107.015 to 107.560|
|New Hampshire||Yes||§§ 479.22 to 479.27-a|
|New Mexico||Yes||§§ 48-10-1 to 48-10-21|
|North Carolina||Yes||§§ 45-4 to 45-107|
|Oklahoma||Yes||§§ 46.40 to 46.49|
|Oregon||Yes||§§ 86.705 to 86.815|
|Rhode Island||Yes||§§ 34-27-1 to 34-27-5|
|South Dakota||Yes||§§ 21-48-1 to 21-4-26|
|Tennessee||Yes||§§ 35-5-101 to 35-5-116|
|Texas||Yes||§§ 51.0001 to 51.016|
|Utah||Yes||§§ 57-1-1 to 57-1-46|
|Vermont||Yes||§§ 4691 to 4670|
|Virginia||Yes||§ 55.1-316 to § 55.1-345|
|Washington||Yes||§§ 61.24.005 to 61.24.190|
|West Virginia||Yes||§§ 38-1-1 to 38-1-17|
|Wyoming||Yes||Title 34, Ch. 3 & Ch. 4|