What is a Deed of Trust?

Often the terms "deed of trust" and "mortgage" are used interchangeably. Though the two are similar, they are actually different instruments, and where you live may determine whether you sign a deed of trust or mortgage when purchasing property. If you live in Tennessee, you will likely be signing a deed of trust.

A deed of trust is a security agreement that is recorded in the county Registrar's Office and secures a promissory note. The promissory note is the borrower's promise to pay a loan, based upon the terms and conditions as recited therein. A deed of trust differs from a mortgage in its use of a third-party (the trustee) to hold legal title to the property. The deed of trust is a conveyance of the real property to the trustee only for the purposes of securing the loan. The deed of trust is also a contract between the borrower, the trustee and the lender, while a mortgage is a two-party contract between the borrower and lender. The trustee's main purpose, in all practicality, is to foreclose on the property in the event of default by the trustor (borrower) and sell the property at public auction. However, often in the event of default a substitute trustee is used to accomplish the foreclosure process.

The deed of trust is a lengthy document full of legal jargon that can appear daunting to your average homebuyer. Sometimes in excess of ten pages and full of small print, this document can be overlooked in importance like the "terms & conditions" we often agree to without reading as we go through our everyday lives. Why? Because at the end of the day it's non-negotiable. If you want to use the latest trending app or website, you do so subject to their terms and conditions that you must accept. Similarly, if you want a lender to let you borrow money, you do so subject to certain terms and conditions. A buyer doesn't get to sit down at the closing table and decide, "I'll sign this deed of trust, but only if we remove the section requiring me to maintain hazard insurance on the property."

That being said, the deed of trust is still one of the most important documents you will sign at the closing table. It contains covenants, or promises, between the borrower and lender, and details obligations that, if a borrower fails to uphold, could result in foreclosure. Therefore, it is very important that a borrower read the deed of trust and ask questions if he or she does not understand the terms contained therein. You can always request a sample copy of the deed of trust from your lender beforehand so that you, or your legal or financial advisors, can review the document at your convenience.

So what does the deed of trust actually say? Often you may see provisions such as the following in a deed of trust or in a rider thereto:

  • Identification of the parties to the deed of trust;
  • Definitions for terms used throughout the deed of trust;
  • Prepayment or late charges;
  • How payments are to be applied to interest and principal;
  • Foreclosure proceedings and requirements;
  • Promises not to keep on the property, or subject the property to, hazardous substances;
  • Promises not to convey the property to another individual without lender approval;
  • Conveyance of an interest in the property by a co-signor who is not a borrower on the promissory note (usually the spouse);
  • Promises not to destroy and to maintain the property in order to keep the property from deteriorating;
  • Promises to occupy the residence as your principal residence if you are purchasing the property as such;
  • Promises to maintain hazard insurance on the property;
  • Promises to make your required monthly payments;
  • Promises to pay property taxes; and,
  • Promises to pay HOA dues if applicable.

While we are all suspicious of fine print, the deed of trust is a closing document just like the others and shouldn't be viewed suspiciously because of the its length and use of big words. As the common joke of the closing table goes, the deed of trust can be summed up as this: "If you don't pay, you don't stay!"

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Thursday, 17 June 2021