When you're buying a home, you may hear some unfamiliar terminology, such as "escrow" and "amortization." Two related but not interchangeable terms you're likely to encounter that are important to understand are "title" and "deed of trust." Title refers to the legal concept of property ownership, while a deed of trust is a security instrument similar to a mortgage showing that title to a particular property is subject to a loan.
Having title to real or personal property means having legal ownership of it. Legal ownership confers the rights to exclusive use and possession of that property as well as the right to transfer or sell it to someone else. With real property such as a home, a written document called a deed acts as evidence. With personal property, such as a car or boat, title is shown by a certificate.
To be valid, a deed must be recorded—that is, filed with the county assessor or registrar of titles—so that it is available to the public. When you purchase a home, your mortgage lender or attorney performs a search on the property to check that the title is clear. In performing this search, the lender reviews all the documents on record relating to that particular property to be sure there are no outstanding loans or tax liens that would give someone else a claim to it. A search will usually result in a report, showing the history of ownership and transfers of the property, including any loans and releases proving that the loans have been paid off.
If a property has multiple owners, the deed must list all of the owners' names. If your name does not appear, you do not have legal ownership even if you have made payments on the property. Therefore, as a property owner, you must amend the property deed to properly reflect changes in its title. For example, you may want to add a name if you get married or transfer title to a living trust. When you make this type of change, the new version must also be recorded.
Deed of Trust Basics
Typically, when you buy a home, you borrow money to finance the purchase and the home serves as collateral for this loan. Whether your home loan is secured by a mortgage or a deed of trust depends on your state's law. Most states nowadays, including California, Texas, and Michigan, require a deed of trust.
A deed of trust is a written instrument with three parties:
- The trustor, who is the borrower and homeowner
- The beneficiary, who is the lender
- The trustee, who is a third party such as an insurance company or escrow management agency that holds actual title to the property in trust for the beneficiary
A deed of trust is used in conjunction with a promissory note documenting the details of the loan, such as the interest rate and the payment schedule. It is filed with the recorder of deeds and becomes part of the property's chain. During the loan period, although the borrower does not have legal title to the property, he enjoys the exclusive legal right to occupy it.
The terms of a deed of trust generally permit the trustee to foreclose on the property without going to court if the borrower fails to make the necessary payments. Once the borrower pays off the loan, the lender releases the deed of trust and prepares a deed of reconveyance, stating that the loan has been repaid and the borrower has no further obligations. The deed of reconveyance is publicly recorded.
Understanding the difference between these two terms will make it easier for you as you navigate the process of buying either real property or high-cost personal property. You should first determine which one is right for you. After determining this, make sure that you have the correct documents to prove ownership of your property.
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