A trust deed is a type of legal instrument that transfers the legal title of a property to a trustee. The trustee then holds the property as security for a loan. In the United States, a trust deed can be created for a variety of purposes, from transferring a home to transferring a business.
The most common use for trust deeds is when financing real estate purchases. Essentially, a trust deed transfers the title of a property to a trustee (usually a title company). The trustee holds the property title as security for the loan and transfers it back to the borrower when the loan is paid in full. Unless the borrower defaults on their payments, the trustee will not be involved in the arrangement, but if they find that the borrower is unable to make payments, they may foreclose on the property and sell it in a nonjudicial foreclosure.
While trust deed investing offers attractive returns compared to traditional investments, it is important to realize that the investment is not liquid. Unless the trust deed is sold or refinanced, the investor will not be paid until the loan matures. This means that an investor should always conduct their due diligence prior to investing.
A trust deed also has a moratorium period, which prevents creditors from taking enforcement action. This moratorium period has been extended from three months to six months, which will last until 30 September 2022. A trust deed is a voluntary agreement between the borrower and creditors. During this time, the borrower agrees to make regular payments towards the debts, with the remainder of the debts written off after a specified time.
When a real estate transaction requires a mortgage, a trust deed is often used. It adds a neutral third party to the mix. When a borrower defaults on their loan, the deed of trust is recorded in the county clerk’s records. If the borrower fails to make their payments, the trustee retains the property title until the loan is paid in full.
A trust deed differs from a mortgage in that it involves a lender and a borrower. The borrower agrees to repay the lender over time, usually in monthly installments, and the property serves as collateral. When the borrower fails to make payments, the lender may foreclose on the property. The borrower may be evicted from the property. The lender may then sell the property.
While deeds of trust are often used in real estate transactions, they are also used in certain states as mortgage alternatives. Although deeds of trust are no longer used in most states, they are still considered to be a valid option in some cases. This is because they are a good alternative for a mortgage and can prevent foreclosure.
While mortgages and trust deeds are different types of agreements, both allow the lender to recover the home if the borrower defaults on the loan. In a mortgage, the lender must go through the courts to enforce a foreclosure, whereas with a trust deed, the lender can pursue a foreclosure process through a nonjudicial method. This can be faster and cheaper than the former.