The words "title" and "deed of trust" are often used in real estate. If you're buying a home, both these are used -- and they might confuse you. Title is actually a legal concept while a deed of trust is a real estate document. Understanding these terms can help you navigate the buying process.
Concept of Title
The word "title" is a legal term refers to the rights of ownership, which are recognized and protected by the law. These rights include exclusive use, possession and conveyance; conveyance is the transfer of ownership of the real estate from one party to another party. When a person buys a home from the current owner, she receives a deed, a legal document that proves real estate ownership. Once she has the deed, she has title to the real estate.
Deed of Trust
A deed of trust, despite the use of the word "deed," is not proof of clear ownership or title. Some states, such as California, use deeds of trust to secure a home loan instead of a mortgage. A deed of trust has three parties: the beneficiary, the trustor and the trustee. The beneficiary is the lender, while the trustor, or grantor, is the borrower, and the trustee is a third party such as a title insurance company. The borrower transfers her interest in the home to the trustee — a person or business who acts as the agent for the lender — on the deed of trust; the trustee actually holds title to the property in most states. The document often contains a clause that gives the trustee the right to act if the borrower defaults. If the borrower doesn't pay her home loan, the trustee can foreclose outside the court system. Some states treat a deed of trust as a lien only -- and the borrower doesn't actually transfer her title to the home to the trustee. Some states, such as Colorado, have public trustees who act as the trustees on all deeds of trust filed in the state instead of a third party chosen by the lender. The document contains information about the home loan, including the amount and loan date, and identifies the affected real estate.
Real estate professionals sometimes refer to title as "clouded." Clouded title occurs when another person or party has rights to the property other than the current owner. For example, an outstanding home loan from a prior owner can create a title cloud because the lender might still have rights to the real estate. Title clouds can make the title unmarketable, particularly if a buyer finds he can't get title insurance. Title insurance is insurance coverage against problems with the home's title; mortgage lenders often require it.
Deed of Trust Release
Once the borrower pays the loan in full, the deed of trust is eligible for release. This is usually accomplished using a deed of reconveyance. The trustee prepares this deed, which transfers the real estate back to the borrower. The deed contains the names of the trustor, trustee and beneficiary, the original loan information and the recording information for the deed of trust. After the deed is recorded in the county land records, the property's title is free of the home loan.