Here is the standard conveyance clause from a Freddie Mac "uniform instrument":īorrower irrevocably grants and conveys to Trustee, in trust, with power of sale, the following described property. states, a deed of trust (but not a mortgage) can contain a special "power of sale" clause that permits the trustee to exercise these powers. If the borrower defaults on the loan, the trustee has the power to foreclose on the property on behalf of the beneficiary. Power of sale and trustee's sale Ī deed of trust has a crucial advantage over a mortgage from the lender's point of view. Besides purchases, deeds of trust can also be used for loans made for other kinds of purposes where real estate is merely offered as collateral, and are also used to secure performance of contracts other than loans. ĭeeds of trust are the most common instrument used in the financing of real estate purchases in Alaska, Arizona, California, Colorado, the District of Columbia, Idaho, Maryland, Mississippi, Missouri, Montana, Nebraska, Nevada, North Carolina, Oregon, Tennessee, Texas, Utah, Virginia, Washington, and West Virginia, whereas most other states use mortgages. When the debt is fully paid, the beneficiary is required by law to promptly direct the trustee to transfer legal title to the property back to the trustor by reconveyance, thereby releasing the security for the debt. The act of recording provides constructive notice to the world that the property has been encumbered. Ī deed of trust is normally recorded with the recorder or county clerk for the county where the property is located as evidence of and security for the debt. This confusing situation is a legacy of the archaic (and now-obsolete) common law requirement of livery of seisin, under which English common law courts had refused to enforce shifting fees or springing freehold interests (that is, a gage for years that was supposed to automatically expand to fee simple title if the underlying debt was not repaid). Both mortgages and deeds of trust are essentially security instruments in the form of conveyances that is, they appear to provide on their face for absolute conveyances of legal title, but it is implicitly understood that the borrower is retaining equitable title and the conveyance is intended to merely create a security interest. In either case, equitable title always remains with the borrower. This ensures the transaction can be easily rescinded if one party is unable to complete its part of the deal.ĭeeds of trust differ from mortgages in that deeds of trust always involve at least three parties, where the third party holds the legal title, while in the context of mortgages, the mortgagor gives legal title directly to the mortgagee. In reality, an escrow holder is always used so that the transaction does not close until the escrow holder has the funds, grant deed, and deed of trust in their possession. Transactions involving deeds of trust are normally structured, at least in theory, so that the lender/beneficiary gives the borrower/trustor the money to buy the property the borrower/trustor tenders the money to the seller the seller executes a grant deed giving the property to the borrower/trustor and the borrower/trustor immediately executes a deed of trust giving the property to the trustee to be held in trust for the lender/beneficiary. The borrower is referred to as the trustor, while the lender is referred to as the beneficiary. The equitable title remains with the borrower. In a deed of trust, a person who wishes to borrow money conveys legal title in real property to a trustee, who holds the property as security for a loan ( debt) from the lender to the borrower. A deed of trust refers to a type of legal instrument which is used to create a security interest in real property and real estate.
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