What Is a Trust Mortgage and How Does It Work?

A trust mortgage, often referred to as a deed of trust, is a financial arrangement used in real estate transactions to secure a loan. It involves the transfer of property title to an impartial third party, known as a trustee, until the borrower fully repays the debt. This mechanism protects the lender’s interest by providing a clear path for recourse should the borrower fail to meet their repayment obligations.

Key Parties and Their Roles

A trust mortgage involves three distinct parties. The borrower, often called the trustor or grantor, obtains the loan to purchase or refinance a property. The trustor retains equitable title, meaning they have the right to use and occupy the property, and they are responsible for making loan payments. The lender, referred to as the beneficiary, provides the funds for the loan and holds a financial interest in the property.

The third party is the trustee, a neutral entity, typically a title company, escrow company, or bank. The trustee holds the legal title to the property on behalf of the lender until the loan is repaid. Their role is to act impartially, protecting the interests of both the borrower and the lender. If the borrower fulfills their loan obligations, the trustee is responsible for reconveying the title back to the borrower. Conversely, if the borrower defaults, the trustee may initiate foreclosure proceedings as outlined in the deed of trust.

How a Trust Mortgage Functions

When a borrower receives funds for a real estate purchase, they sign a promissory note, which is a promise to repay the debt, and a deed of trust, which secures that promise with the property. The deed of trust transfers legal title of the property to the trustee. The borrower, however, retains equitable title, allowing them to possess, use, and enjoy the property.

The trustee’s role remains passive unless a specific event, such as a default or full repayment, occurs. The deed of trust outlines the terms and conditions, including the repayment schedule and the actions to be taken if the borrower defaults. Once the borrower repays the loan in full, the trustee issues a deed of reconveyance. This legal document transfers the legal title back to the borrower, officially releasing the lien on the property. The deed of reconveyance is then recorded with the county recorder’s office to clear the title.

Distinguishing Trust Mortgages from Traditional Mortgages

The primary distinction between a trust mortgage (deed of trust) and a traditional mortgage lies in the number of parties involved and the method of securing the loan. A traditional mortgage involves two parties: the borrower and the lender. The borrower retains legal title to the property, and the mortgage creates a lien against the property. If the borrower defaults, the lender must go through a judicial foreclosure process, which involves court intervention, to reclaim the property.

In contrast, a trust mortgage introduces a third party, the trustee, creating a three-party agreement. Under a trust mortgage, the legal title to the property is conveyed to the trustee, who holds it on behalf of the lender until the loan is repaid. This structural difference impacts the foreclosure process significantly; trust mortgages include a “power of sale” clause that allows for non-judicial foreclosure, which bypasses the court system. This results in a faster and less expensive foreclosure for the lender.

Foreclosure Under a Trust Mortgage

When a borrower fails to meet the terms of a trust mortgage, the lender can initiate foreclosure proceedings. Trust mortgages contain a “power of sale” clause, which grants the trustee the authority to sell the property without requiring a court order. This allows for a non-judicial foreclosure process, which is quicker and less costly than a judicial foreclosure. The process begins with the lender notifying the trustee of the borrower’s default.

The trustee records a Notice of Default with the county recorder and provides notice to the borrower, specifying the amount owed and a deadline to cure the default. If the default is not cured within the specified period, a Notice of Sale is issued and publicly announced. After a set waiting period, the property is sold at a public auction by the trustee. Upon sale, the trustee issues a Trustee’s Deed to the new owner, transferring ownership.