Real Estate Finance
What Is a Deed of Trust in Real Estate?
A deed of trust is a legal document that creates a security interest in real property as collateral for a loan. It involves three parties: the borrower (trustor), the lender (beneficiary), and a neutral third party (trustee) who holds legal title until the loan is repaid. It functions similarly to a mortgage but with important legal differences.
Deed of Trust vs. Mortgage
Deed of Trust
Three parties: borrower (trustor), lender (beneficiary), trustee. Trustee holds legal title. Foreclosure is non-judicial (faster) in most states using a 'power of sale' clause. Used in: CA, TX, VA, CO, AZ, GA, NC, and others.
Mortgage
Two parties: borrower (mortgagor) and lender (mortgagee). Borrower holds title; lender holds a lien. Foreclosure must go through court (judicial foreclosure) — a slower, more expensive process. Used in: NY, FL, IL, NJ, OH, and others.
Deed of Trust FAQ
Who is the trustee on a deed of trust?
The trustee is a neutral third party — often a title company, attorney, or a subsidiary of the lender. The trustee holds legal title but has a passive role unless the borrower defaults. Upon default, the trustee conducts the non-judicial foreclosure sale at the lender's direction.
What is reconveyance on a deed of trust?
When a loan is paid off, the trustee executes a Deed of Reconveyance (or Full Reconveyance) which transfers legal title back to the borrower free and clear. This document should be recorded in the county records to clear the lien. In states using mortgages, the equivalent document is a mortgage satisfaction or discharge.
Can a buyer assume a deed of trust?
Only if the loan is assumable. Most conventional loans have a 'due-on-sale' clause requiring the loan to be paid off when the property transfers. FHA and VA loans are assumable with lender approval. Assuming a low-rate loan is advantageous for buyers in high-rate environments.
What is a subordination clause in a deed of trust?
A subordination clause allows a first deed of trust to maintain priority over a later recorded deed. Without subordination, a refinance would technically create a new first position lien, pushing existing liens ahead of the new loan — which lenders won't allow. Subordination agreements keep priority in the correct order.
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