Purchasing a home is the biggest transaction most of us will make in our lives, and because of that, understanding the necessary documents is essential. People sometimes confuse a deed with a trust deed -- also called a "deed of trust" -- because they sound so similar, but each document serves an entirely different purpose. Another source of confusion is that trust deeds aren't used in all jurisdictions, and a number of states don't allow them. The easiest way to understand the role of a trust deed is in context with two other documents commonly used in any typical real estate transaction: the deed and the promissory note.
A deed is the legal document that transfers ownership from a seller to a buyer. It is filed with the county recorder’s office and serves as a form of proof that establishes the identity of the titled owner to the property.
Most people do not have the financial ability to purchase a home outright. As a result, homebuyers typically obtain financing through a home loan lender. When financing is involved, an additional document setting forth the terms of the financing is needed. The agreement between the lender and the buyer is set forth in a contract called a promissory note.
The lender does not want to be left empty-handed if it turns out that the buyer cannot repay the debt in accordance with the terms set forth in the promissory note. To protect against this, the lender requires the buyer to provide the lender with a "security interest" in the home. This means that if the buyer defaults on the loan by failing to make the monthly payments required by the contract, the lender has the right to sell the security -- the home in this case -- to repay the debt.
When recorded with the county recorder’s office, the trust deed acts as a lien on the property, meaning that it puts creditors on notice that the lender has been granted a security interest in the property. If more than one lender records a deed of trust on the same property, the lenders are paid in the order that the respective liens were recorded. In states where trust deeds are not allowed, a similar document called a mortgage agreement serves a similar purpose, but with some distinct differences.
A trust deed also brings a third party into the transaction. This party is called the trustee. If the borrower defaults on the promissory note, the trustee is actually the party that has the right to sell the home and pay off the lender for the loan, using the proceeds from the sale. This streamlined system is called a non-judicial foreclosure and allows the lender to avoid costly litigation by avoiding the court process all together. In jurisdictions where the security document on a home loan is a mortgage and not a trust deed, there is no third party involved; the lien against the property is held by the lender, and foreclosure normally requires going through the courts.
- Cornell University Law School Legal Information Institute: Deed of Trust
- Sacramento County Public Law Library: Deed of Trust and Promissory Note: Step by Step
- California Department of Real Estate: Title to Real Property
- Realty Times: What is a Trust Deed? Is it a Mortgage?
- 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.
An attorney for more than 20 years, Cara O'Neill currently practices in the areas of civil litigation, family law and bankruptcy. She also served as an Administrative Law Judge and taught undergraduate and graduate courses in the areas of employment law, business law and criminal law for a well-known university. Attending the University of the Pacific, McGeorge School of Law, she graduated a National member of the Order of the Barristers - an honor society recognizing excellence in courtroom advocacy. She is currently licensed in the state of California.