Understanding Trust Deeds

understanding trust deeds

Trust deeds play an important role in finance and real estate when you need a loan. Whether you are a first-time home buyer or an accredited investor, it’s imperative to know what trust deeds are and how they work. We’ll dive into the overall concept of trust deeds and their underlying value. 

This article will use examples to break down complex terminology to help you best grasp trust deeds.



Within real estate transactions and financing, trust deeds play a critical role. They help ensure that both the borrowers and lenders are protected. When you know the pros and cons of these deeds, you’ll be better at making strategic investment decisions in real estate.


What is a Trust Deed?

A trust deed is sometimes referred to as a deed of trust. It’s a legal agreement between three parties. These include the borrower, the trustor, the lender, the beneficiary, and the trustee. This arrangement is used over and over in real estate, especially mortgage loans.


In simple terms, a trust deed is a financial instrument in which the lender claims the property title until the borrower repays the entire loan. It’s important to note that a mortgage has two parties, the borrower and the lender. The trust deed also has a trustee to allow a smoother foreclosure process. This only happens if the borrower defaults on the loan.


How Does a Trust Deed Work?

Let’s say you want to purchase a home but need a loan. The lender will give you the loan you need but needs you to sign a trust deed. This means that you will hold the property’s title but the trustee, a neutral party, will hold it in a trust for the lender. This covers the lender if loan agreements are broken.


So, if you fail to make your loan payments or violate the existing agreement, the lender isn’t stuck with nothing. The trustee would then initiate the foreclosure on behalf of the lender. This is also the efficiency of a trust deed. No courts need to get involved in most states. This makes the foreclosure process much quicker.


Key Parties Involved


  • Borrower (Trustor): The individual or entity that takes out the loan and agrees to pay it back.

  • Lender (Beneficiary): The entity providing the loan to the borrower.

  • Trustee: A neutral third party that is responsible for holding the property’s title in a trust, then acting on behalf of the lender if the loan agreement is violated.

Types of Trust Deeds

There are two types of trust deeds, revocable and irrevocable.


  • Revocable Trust Deed: The borrower can modify the trust deed’s terms and conditions.

  • Irrevocable Trust Deed: The trust deed cannot be changed without the consent of all parties.

Benefits of Trust Deeds

Trust deeds offer several advantages, including:


  • Faster Foreclosure Process: Trust deeds allow for a quicker foreclosure process compared to traditional mortgages.

  • Flexibility: Parties can negotiate and customize terms to suit their specific needs.

  • Efficiency: Trust deeds often involve fewer legal procedures, making them a quicker option for property transactions.

Examples of Trust Deed Scenarios


  1. Home Purchase: A buyer secures a trust deed to finance the purchase of a new home, with the lender becoming the beneficiary.
  2. Real Estate Investment: An investor uses a trust deed to secure funds for purchasing an income-generating property.
  3. Refinancing: Homeowners may opt for a trust deed to take advantage of better interest rates when refinancing their mortgage.


Steps to Establish a Trust Deed


  1. Loan Application: The borrower applies for a loan from the lender.
  2. Trust Deed Creation: A trust deed is drafted, outlining the terms and conditions.
  3. Trustee Appointment: A trustee is appointed.
  4. Signing and Recording: The trust deed is signed by all parties and recorded with the appropriate government office.


Potential Risks and Considerations


  • Foreclosure Risk: Failing to meet loan obligations can result in foreclosure.

  • Legal Complexity: Trust deeds involve legal nuances that require careful consideration. Lawyers are recommended to get involved.

  • Equity Impact: Foreclosure can affect the borrower’s equity and credit score.


As you can see, trust deeds play a pivotal role in financial transactions to protect the lender. By grasping the fundamentals of trust deeds, you can easily navigate property transactions and loans. 

Remember, whether you’re a homebuyer or an investor, understanding trust deeds within your transactions is crucial for your financial protection.  


Have a question? Email Brenda