Create a Deed of Trust Online

While both deeds of trust and mortgages serve the same fundamental purpose — securing a real estate loan with the property as collateral — they differ in significant ways that affect both the lender's and borrower's rights.

Number of parties: A mortgage is a two-party instrument between the borrower (mortgagor) and the lender (mortgagee). A deed of trust is a three-party instrument involving the borrower (trustor), the lender (beneficiary), and an independent trustee. The trustee's role is to hold legal title as a neutral party and, if necessary, to conduct the foreclosure process.

Title holding: With a mortgage, the borrower retains legal title to the property, and the lender holds a lien against it. With a deed of trust, legal title is transferred to the trustee until the loan is repaid. In practice, this distinction has limited day-to-day impact on the borrower — they still possess and use the property — but it becomes significant in the event of default.

Foreclosure process: This is the most important practical difference. Mortgage foreclosure is typically a judicial process — the lender must file a lawsuit, go through court proceedings, and obtain a court order to sell the property. This process can take 6 months to several years and is expensive for the lender. Deed of trust foreclosure can be nonjudicial — the trustee can sell the property at a public auction without going to court, following a statutory notice and waiting period. This process typically takes 3-6 months and is significantly less expensive. The availability of nonjudicial foreclosure is the primary reason lenders prefer deeds of trust in states where they are available.

Right of redemption: In many states with judicial foreclosure (mortgage states), the borrower has a statutory right of redemption — a period after the foreclosure sale during which they can reclaim the property by paying the full amount owed. In most deed of trust states, there is no post-sale right of redemption, although the borrower typically has the right to cure the default (reinstate the loan) up until a certain point before the trustee's sale.

Deficiency judgments: When a foreclosure sale does not generate enough proceeds to cover the outstanding loan balance, the lender may seek a deficiency judgment against the borrower for the remaining amount. The rules governing deficiency judgments vary by state and may differ depending on whether the security instrument is a mortgage or deed of trust. Some states prohibit deficiency judgments after nonjudicial foreclosure, which is an important consideration for both lenders and borrowers.

A properly drafted deed of trust must include several essential elements to be valid and enforceable. Understanding these components helps both borrowers and lenders ensure their interests are protected.

• Three parties identified: The deed of trust must clearly identify the trustor (borrower who owns the property), the beneficiary (lender who is making the loan), and the trustee (neutral third party who holds legal title). The trustee must be an individual or entity authorized to serve in that capacity under state law — in many states, only attorneys, title companies, or licensed trust companies can serve as trustees.
• Property description: A complete and accurate legal description of the property being encumbered, including the street address, county, legal description (metes and bounds, lot and block, or government survey), and the tax parcel identification number. The property description must match the description in the county records exactly.
• Loan terms: Reference to the promissory note that the deed of trust secures, including the loan amount, interest rate, maturity date, and payment terms. The deed of trust and the promissory note are companion documents — the note creates the debt obligation and the deed of trust provides the security for that obligation.
• Power of sale clause: A clause granting the trustee the authority to sell the property if the borrower defaults. This clause is what enables nonjudicial foreclosure. Without a power of sale clause, the lender would need to pursue judicial foreclosure even in states that allow nonjudicial foreclosure. The power of sale clause must comply with state statutory requirements.
• Trustor's covenants: The borrower's promises regarding the property, which typically include maintaining insurance, paying property taxes, keeping the property in good repair, not committing waste, and not creating additional liens without the lender's consent. Breach of any covenant can constitute a default under the deed of trust.
• Reconveyance clause: A provision requiring the trustee to reconvey legal title to the borrower upon full repayment of the loan. This is the mechanism by which the borrower regains clear title to the property once the debt is satisfied.
• Due on sale clause: A provision allowing the lender to accelerate the loan (demand full repayment) if the borrower transfers the property without the lender's consent. This clause protects the lender's interest in the borrower's continued ownership and responsibility for the property.

The power of sale clause is one of the most significant provisions in a deed of trust because it determines how foreclosure will be conducted if the borrower defaults. Understanding the nonjudicial foreclosure process is important for all three parties to the deed of trust.

How nonjudicial foreclosure works: When the borrower defaults on the loan, the beneficiary (lender) instructs the trustee to begin the foreclosure process. The trustee records a notice of default with the county recorder, which starts the statutory waiting period (typically 90 days to 6 months, depending on the state). During this period, the borrower has the right to cure the default by bringing the loan current — paying all missed payments, late fees, and the trustee's costs. If the borrower does not cure the default, the trustee records a notice of sale and publishes notice of the upcoming trustee's sale in a local newspaper. The sale is then conducted as a public auction, with the property going to the highest bidder.

The trustee's role in foreclosure: The trustee must act impartially — they represent neither the borrower nor the lender but rather ensure that the foreclosure process is conducted fairly and in accordance with the law. The trustee is responsible for providing all required notices, conducting the sale in the manner prescribed by law, and distributing the sale proceeds according to the priority of liens. The trustee's fiduciary duty to both parties is a key protection built into the deed of trust structure.

Borrower protections: Although nonjudicial foreclosure is faster than judicial foreclosure, borrowers still have important protections. These include the right to receive proper notice of default and sale, the right to cure the default within the statutory period, the right to contest the foreclosure if proper procedures were not followed, and in some states, the right to request mediation with the lender before the sale. Some states also require the lender to demonstrate that they attempted to work with the borrower on a loan modification before proceeding with foreclosure.

Reconveyance upon full payment: When the borrower repays the loan in full — whether through regular payments, refinancing, or sale of the property — the beneficiary must instruct the trustee to reconvey legal title to the borrower by recording a deed of reconveyance. This document releases the lien created by the deed of trust and restores clear title to the borrower. If the beneficiary fails to request reconveyance in a timely manner, most states allow the borrower to demand it and may impose penalties on the beneficiary for delay.

Proper recording of a deed of trust is essential to protect the lender's security interest and to provide public notice of the encumbrance on the property.

Where to record: A deed of trust must be recorded with the county recorder's office (or equivalent office) in the county where the property is located. Recording creates a public record of the lien and establishes the lender's priority position relative to other creditors. An unrecorded deed of trust may not be enforceable against third parties who acquire an interest in the property without notice of the lien.

Recording priority: The date and time of recording determines the lender's priority — a first-recorded deed of trust has priority over a second-recorded deed of trust, meaning the first lender gets paid before the second lender from any foreclosure sale proceeds. This is why title searches are conducted before loan closings — to verify that no prior liens or encumbrances exist that would take priority over the new lender's security interest.

Documentary requirements: To be accepted for recording, a deed of trust must typically meet certain requirements: it must be an original document (or certified copy), properly signed by the trustor, acknowledged before a notary public, and contain the legal description of the property. Some states require additional elements such as a transfer tax declaration, a preliminary change of ownership report, or specific formatting requirements (margin sizes, font requirements, etc.).

Title insurance: Title insurance protects the lender (and optionally the borrower) against defects in the title that were not discovered during the title search. Lender's title insurance is typically required as a condition of the loan and protects the lender if a title defect causes the deed of trust to be unenforceable or subordinate to a prior lien. Owner's title insurance is optional but recommended — it protects the borrower's equity in the property against title claims.

Reconveyance recording: When the loan is repaid, the deed of reconveyance must also be recorded to clear the lien from the public record. An unreleased deed of trust can create complications when the borrower later tries to sell or refinance the property. Most states have statutory deadlines for recording the reconveyance and penalties for lenders who fail to do so promptly.

Both lenders and borrowers should be aware of common mistakes that can undermine the effectiveness of a deed of trust or create legal complications.

Incorrect property description: Using an incorrect or incomplete legal description is one of the most common and serious errors. If the property description in the deed of trust does not match the actual property, the lien may not attach to the intended property, leaving the lender unsecured. Always use the legal description from the most recent deed of record, verified by a current title search.

Improper trustee selection: The trustee must be authorized to serve in that capacity under state law. In some states, only certain types of entities (attorneys, title companies, banks) can serve as trustees. Appointing an unauthorized trustee can invalidate the deed of trust or the foreclosure process. The trustee should also be independent — not an employee or affiliate of the lender — to fulfill their fiduciary duties to both parties.

Missing power of sale clause: If the deed of trust does not include a power of sale clause (or the clause does not comply with state statutory requirements), the lender cannot pursue nonjudicial foreclosure. They would need to pursue judicial foreclosure instead, which is more expensive and time-consuming. Ensure the power of sale clause is included and properly drafted.

Failure to record promptly: Delaying recording of the deed of trust creates a window during which other liens could be recorded against the property, taking priority over the lender's security interest. The deed of trust should be recorded immediately after closing — on the same day if possible. Any delay increases the risk that an intervening lien (tax lien, judgment lien, mechanic's lien) could take priority.

Not requiring insurance: Failure to require the borrower to maintain adequate property insurance puts both parties at risk. If the property is damaged or destroyed and there is no insurance coverage, the lender's security may be significantly diminished while the borrower still owes the full loan amount. The deed of trust should require the borrower to maintain insurance with the lender named as a loss payee, and the lender should verify coverage regularly.

Ignoring escrow requirements: Many deeds of trust require the borrower to make escrow payments for property taxes and insurance in addition to principal and interest payments. Failing to establish and maintain an escrow account can lead to lapses in tax payments or insurance coverage, both of which jeopardize the lender's security interest. The escrow provisions should be clearly defined in the deed of trust.