Legal Definitions - trust deed

A trust deed, also known as a deed of trust, is a legal document used in some states, such as California and Massachusetts, to secure real estate transactions. It is an alternative to a mortgage.

When a borrower needs money to finance property renovations or other projects, they can get money from a lender by giving the lender one or more promissory notes. As security for the promissory notes, the borrower transfers a real property interest to a third-party trustee. This trustee can be a title company.

If the borrower defaults on the terms of the loan, the trustee may take full control of the property to correct the borrower's default. The trustee holds the property in trust for the use and benefit of the borrower. In some states, the trustee merely holds a lien on the property.

Trust deeds usually include a power-of-sale clause, which allows the trustee to conduct a non-judicial foreclosure. This means that the trustee can sell the property without first getting a court order. This benefits lenders because they can foreclose on the property much quicker and usually cheaper than having to get a court order, which can take years in some states.

In a typical home loan, the borrower is the person buying the home, the lender is a bank, and the trustee is a title company. The borrower makes monthly payments to the bank. If the borrower goes into default, the title company initiates a non-judicial foreclosure as the bank's agent.

For example, if a borrower takes out a trust deed to finance a home renovation project and fails to make payments, the trustee can sell the property to recover the money owed to the lender. This is done without going through the court system, which can save time and money for both the lender and the borrower.