National Real Estate Exam (PSI)Transfer of TitleHard
A borrower is comparing a mortgage instrument to a deed of trust for financing a home purchase. Which feature distinguishes a deed of trust from a traditional two-party mortgage?
- AA deed of trust involves a third-party trustee who holds legal title until the debt is repaid
- BA deed of trust cannot be used to secure a loan on real property
- CA deed of trust automatically converts to a mortgage once the loan is fully repaid
- DA deed of trust requires the lender to hold equitable title throughout the loan term
Show answer & explanationAnswer & explanation
Correct answer: A. A deed of trust involves a third-party trustee who holds legal title until the debt is repaid
A deed of trust is a three-party instrument involving a borrower (trustor), lender (beneficiary), and a neutral third-party trustee who holds bare legal title to the property as security until the debt is paid in full. This structure allows for nonjudicial foreclosure through a power-of-sale clause in many states, unlike a traditional two-party mortgage.
Why the other options are wrong
- B. Deeds of trust are commonly used to secure real estate loans, functioning similarly to mortgages.
- C. Once repaid, the trustee reconveys title to the borrower; it does not convert into a mortgage.
- D. The trustee, not the lender, holds legal title; the borrower retains equitable title and possession.
Deed of Trust vs Mortgage
A deed of trust is a three-party security instrument (borrower, lender, trustee) where a neutral trustee holds legal title until the loan is repaid, unlike a two-party mortgage.
- Trustee holds bare legal title as security
- Enables nonjudicial (power-of-sale) foreclosure in many states
- Borrower retains equitable title and possession during the loan term
Memory trick: 'Trust has three: borrower, lender, and the trustee referee.'