If you’ve ever gone through the process of purchasing real estate, you may have come across the term “Deed of Trust.” But what are deeds of trust, why are they important, and when might you run across one in running your business?
Use our guide below to learn more about the deed of trust business definition. Then, when you have questions about starting or growing your small business, see how we can help.
A deed of trust is a particular type of legal document frequently used in financed real estate transactions.
Deeds of trust involve three parties:
The deed of trust essentially acts as an agreement between these parties stating that in exchange for financing provided to the borrower by the lender, the borrower agrees to provide the lender one or more promissory notes. These promissory notes are essentially promises to pay back the borrowed money subject to the terms of the loan.
Throughout the duration of the loan, the parties agree that a third party, the trustee, will hold legal title to the property in trust until the borrower pays off the balance of the debt to the lender.
The primary benefit of a deed of trust is that it allows borrowers, who may not otherwise be able to do so, to purchase real estate. With a deed of trust, you can still hold equitable title to real estate and thereby use and enjoy the benefits of property ownership while being able to finance the transaction and pay the debt back over a period of time.
Thus, if you need to purchase real estate for your business but don’t have the means to do so in full, you might consider financing through a deed of trust.
There are certain disadvantages of utilizing a deed of trust to purchase real estate.
As with most loan arrangements, there will be interest charges that will ultimately increase your out-of-pocket cost for the purchase over the life of the loan. Additionally, most deeds of trust include power-of-sale clauses. This means that if you default on the terms of your loan, the trustee may elect to proceed with a non-judicial foreclosure on the property. Thus, if you can’t afford to keep up with your payments, you risk losing your ownership of the property without the need for court intervention.
A deed of trust is similar to a mortgage in that they are both instruments used to finance real estate transactions. However, whereas a deed of trust involves three parties, a mortgage only involves two: the borrower and the bank.
Thus, with a mortgage, there is no third-party trustee who holds the security interest in the title to the property. Rather, a mortgage creates a lien against the property in favor of the lender. This allows the lender to pursue foreclosure proceedings if the lender defaults on the loan.
No, not everyone will need a deed of trust to purchase real estate.
If you’re able to purchase certain real estate with cash, you won’t need financing or a deed of trust. Additionally, not all states require the use of a deed of trust to finance real estate. Rather, many states continue to use the traditional mortgage process instead.
There are many deed of trust advantages, with the primary one being the ability to finance real estate transactions. Nevertheless, a deed of trust may not be advantageous for all prospective purchasers of property. Additionally, deeds of trust aren’t used in all states.
Thus, be sure to speak with your lender, real estate agent, or legal advisor before utilizing a deed of trust.
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Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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