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 a promissory note, a form that establishes the borrower’s obligation to pay back the loaned amount in full.
If the borrower defaults on the loan, the trustee will have the right to foreclose the property and sell it at auction in order to clear the default. In most states that recognize them, deeds of trust enable the foreclosure to bypass the judicial process which is ordinarily required under a mortgage. Judicial foreclosures can be a significant inconvenience for lenders, making deeds of trust the preferable arrangement where permitted.
Deeds of trust are currently permitted in thirty-seven (37) states.
- New Hampshire
- New Mexico
- New York
- North Carolina
- North Dakota
- Rhode Island
- South Carolina
- South Dakota
- West Virginia
A deed of trust, or “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 that the legal title to the property is held by the trustee, and will only be only released to the borrower once the loan has been repaid.
While some states have requirements for who can act as a trustee, the trustee is typically one (1) of the following individuals/entities:
- 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 parties may have the privilege of choosing the trustee together. Alternatively, the lender may reserve the full right to choose a trustee on their own.
While both deeds of trust and mortgages are used for lending, they have a few key differences, namely the following points:
- Foreclosure process – With a mortgage, the lender often has to file a lawsuit against the homeowner after default occurs. With a deed of trust, the foreclosure process is significantly faster, 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. Deeds of trust on the other hand involve the borrower, the lender, and the trustee.
Most deeds of trust contain an essential provision called 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. Generally speaking, if a state permits power of sale clauses, they’ll also allow deeds of trust, although there are some exceptions to this rule.
The following table contains the statutes pertaining to deeds of trust and 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, § 35-10-3|
|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||§§ 89-1-53 to § 89-1-59, § 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 Carolina||Yes||§§ 29-3-10 to 29-3-800|
|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|