Q: We recently went to settlement on our first home, and the person conducting the settlement had us sign a number of documents, including one called a “deed of trust”. I asked the settlement officer what that was, and he said it was the mortgage on our property. Why is it called a “deed of trust” and what’s the difference between a “deed of trust” and a “deed”?

A: Whether you are a first-time homebuyer or an experienced professional investor, you are entitled to get all of your questions fully answered when you go to settlement. There are too many settlement officers – including attorneys – who treat a settlement as if it is just a routine procedure that is required by the lenders.

That is not the way it should be. A settlement is, in effect, both the end of the buying process as well as the beginning of home ownership. As a buyer, you should fully understand each document you sign. You should not be rushed through the process just because there is another settlement waiting in the reception room.

At settlement (called “escrow” in some parts of Western United States) the buyer signs a number of legal documents. Each of these documents are significant, and can have a major impact on your life (and your home) in the future. While there are a huge number of papers you have to sign, the most important ones are the promissory note, the settlement statement (called a HUD-1) and the deed of trust.

The seller will also have to sign a number of documents, most notably the deed and the HUD-1.

A deed is the document which legally conveys the property to you. The seller should read it carefully, and confirm that the legal description contained in the deed is correct. The buyer should also review the deed, since it will be recorded among the land records in the jurisdiction where your property is located.

There are three important things in a deed that a buyer should review:

• is the legal description correct? Ask the person conducting settlement to compare the legal description in the deed to the description in the title binder that the settlement company obtained when they obtained the title search from land records. I would rather catch mistakes now before that deed has been recorded.
• are the names spelled right? The seller is the grantor, and the buyer is the grantee. Titles are searched in what as known as a “grantor” index, and clearly if a name is misspelled, there will be problems in the future when you go to sell or refinance your house.
• how are you taking title to the property? This will be spelled out right in the deed. If you are purchasing your house in your own name, the deed will state “as sole owner”. If you are taking title with your spouse, the deed will usually state “as tenants by the entirety”. If you are taking title with a friend, the title will either be held as “tenants in common” or as “joint tenants with rights of survivorship”. It is important that you discuss how you are going to take title with your own attorney
• before settlement. Unless the person conducting the settlement is your own lawyer, that person should not give you legal advice, nor should you rely on any such advice from the settlement person.

The promissory note is the IOU; you agree to pay the lender the full amount of the loan, at the interest rate stated in the note, for the number of years that you obtain the loan. This is a very important document, and you should not only read it carefully at settlement, but get a copy of this document before you leave the settlement office.

What is a deed of trust? The settlement officer was correct: it is the mortgage document. My legal dictionary defines it as follows:

An instrument used in many states in place of a mortgage. Property is transferred to a trustee by a borrower (trustor), in favor of the lender (beneficiary), and reconveyed upon payment in full.

Although the laws on deeds of trust vary from state to state, here is an oversimplified explanation of a deed of trust.

In the early history of mortgage lending, lenders used only a mortgage document. This was recorded among the land records, and if the borrower defaulted on the mortgage payments, the lender had to go to Court in order to foreclose. From the lender’s point of view, this was a time-consuming and expensive process.

Accordingly, many years ago, some imaginative attorney (or lender) conceived of the idea of the deed of trust. At settlement, the seller would convey the property by deed to the buyer. The buyer would simultaneously convey the property – in trust – to one or two trustees selected by the lender. In effect, legal title (in many states) would be transferred to these trustees. The trustees would hold this legal title until one of two events occurred:

Published: April 21, 2003

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