Deeds of trust are one of the two ways that loans on real estate are secured. Along with mortgages, they give the lender a specific right to the property that comes into play if you don't make your loan payments. Some trust deeds also have an "assignment of rents" provision. Usually included in rental property trust deeds, this provision lets the lender collect the rents from any tenants in the property.
Notes and Trust Deeds
When you take out a property loan, you sign an agreement called a promissory note. In that note, you promise to pay back the lender's money. By itself, though, the note doesn't do much -- all that the lender has is your word and if you break your word, your lender would have to go through the same collection process as any other loan. To back your promise and show your lender that you really mean it, you also sign a second document called a security agreement. That security agreement, which comes in the form of a mortgage or deed of trust depending on your state, takes the piece of property and pledges it to back your promise to pay the loan back.
Trust Deed Basics
With a trust deed, you actually put the title to your home in a state of limbo, making it easier for the lender to take if you don't make your loan payments. Since you put your title into trust, you're the "trustor." A third party "trustee" watches over the home's title, not doing anything with it as long as you make your payments to the lender, who is the "beneficiary" of the trust. If everything goes well and you pay the loan off, the title will be reconveyed to you. When you don't pay the loan, though, the trustee has the power to reassign the property's title to the lender.
Trust Deed Foreclosure
Trust deeds usually get foreclosed on in a non-judicial process. The first step occurs when you receive a notice of default that lets you know that you've violated your loan agreement. Next, you get a notice of sale in which you're informed that your house is being sold because of your breach. After the sale, you may get a period of time during which you can pay off the loan, but after that period ends, you have to move out. With a trust deed, you don't automatically get a court hearing to defend yourself like you might in a state that uses a mortgage and has judicial foreclosure process.
Assignment of Rents
The assignment of rents clause comes into play when you have a rental property. When the lender takes the property back through a foreclosure, it technically doesn't have an impact on the rental agreements, since those are private contracts between you and your tenants. Furthermore, if you have other creditors, your lender technically has to fight them to collect the rents. The assignment of rents clause in some trust deeds solves this problem for the lender by clearly stating that if the lender takes the property, it also gets the right to collect rent assigned to it.
- Nolo: What's the Difference Between a Mortgage and a Promissory Note?
- LawDepot.com: Deed of Trust FAQ
- Nolo: Nonjudicial Foreclosures
- The National Conference of Commissioners on Uniform State Laws: Assignment of Rents Act Summary
- American Bar Association. "Commercial Real Estate FAQs: What Is the Difference Between a Mortgage and a Deed of Trust?" Accessed July 31, 2020.
- Cornell Law School. "Deed of Trust." Accessed April 6, 2020.
- Consumer Financial Protection Bureau. "Deed of Trust." Accessed July 5, 2020.
- American Bar Association. "Glossary of Real Estate Terms: Deed of Trust." Accessed July 31, 2020.
- Consumer Financial Protection Bureau. "How Does Foreclosure Work?" Accessed July 5, 2020.
- American Bar Association. "Mortgage Note -- Deed of Trust Note." Accessed July 31, 2020.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.