What is a Trustor in Real Estate Financing: Simple Guide for Students

One term that appears a lot in your licensing exam for real estate is trustor. As a real estate student, you’ll encounter trustors primarily in loan trusts for financing, and understanding this concept is crucial for your exam and future career as an agent. Don’t worry – we’ll keep it simple.

So, what exactly is a trustor in real estate financing?

In real estate financing, the trustor is the borrower who obtains a loan and grants a deed of trust to a trustee as security for the loan. The trustee holds the legal title of the property until the loan is repaid.

Think of it as saying, “I want someone trustworthy to hold my property deed while I pay back this loan.” It’s a legal relationship that protects the lender during the loan process while the trustor retains equitable title and the right to occupy and use the property.

Here’s a real-life example

Mike wants to buy a house, and he needs a loan for it. If he lives in a state that uses deed of trust arrangements, then he’ll have to give the deed to his property to a neutral third party, the trustee. He will then become the trustor after he signs the deed of trust. The trustee will hold the deed as security for the loan, and the lender, the party that provides the funds for the house, becomes the beneficiary of this trust arrangement.

What is a deed of trust?

A deed of trust is a legal document used in real estate financing that involves three parties: the trustor (borrower), the trustee (neutral third party), and the beneficiary (lender). Instead of giving the mortgage directly to the lender, the borrower gives the property deed to a trustee who holds it as security until the loan is paid off. This arrangement is used as an alternative to traditional mortgages in many states.

Types of Trusts In Real Estate

Not all trusts are the same. While this guide focuses on deed of trust arrangements, it’s helpful to know the other types you might encounter in real estate and estate planning:

• Revocable Trust: The trustor can modify or cancel the trust during their lifetime. Common in estate planning for flexibility.
  
• Irrevocable Trust: Once set up, it can’t be changed without the beneficiary’s consent. Often used to protect assets from taxes or creditors.
  
• Living Trust: Created while the trustor is alive, it allows property to transfer to beneficiaries without going through probate court.
  

Though different from deed of trust financing, these trust types are worth understanding for real estate professionals and clients alike

Trustor vs. trustee: what’s the difference?

Let’s review these different actors in real estate loan trusts:

Trustor: The borrower who creates the deed of trust and gives their property deed as collateral. 

Trustee: The neutral third party who holds the property deed as security for the loan. 

Beneficiary: The lender who benefits from the security arrangement.

Let’s go back to our scenario: Mike is the trustor because he’s the borrower. The title company or attorney holding the deed is the trustee. The lender is the beneficiary.

More About the Trustee’s Role

While the trustor initiates the trust by signing over the property, the trustee has a fiduciary duty to act impartially and protect the interests of the lender (beneficiary). In real estate financing, this means:

• Holding the legal title to the property during the loan term.
  
• Managing the trust according to state laws.
  
• Initiating foreclosure if the trustor defaults.
  

The trustee must remain neutral. They don’t work for the borrower or the lender and ensures the process follows legal guidelines.

Why are deed of trust arrangements used in real estate financing?

This is actually much more common in many states! When you get a loan, you might become a trustor in what’s called a “deed of trust”, which offers benefits such as:

• Faster Foreclosure Process: If you can’t make payments, lenders can foreclose more quickly than with traditional mortgages, reducing costs for everyone.
• Lower Closing Costs: Trust deeds typically involve fewer fees and simpler paperwork than traditional mortgages.
• Clearer Legal Process: The roles are clearly defined – you’re the trustor, the lender is the beneficiary, and there’s a neutral third party (trustee) who holds the deed.
• No Judicial Foreclosure: The process does not require court involvement, making it quicker and more cost-effective for everyone.

What does a trustor do in a deed of trust arrangement?

Being a trustor isn’t just a fancy title. It comes with some responsibilities as well:

• Signing the Deed of Trust: They work with a lawyer or title company to establish the necessary legal documents.
• Making Loan Payments: They must make regular payments to the lender as agreed in the loan terms.
• Maintaining the Property: They’re responsible for keeping the property in good condition and maintaining insurance.
• Following Loan Terms: They must comply with all conditions outlined in the deed of trust and loan agreement.

FAQ: Trustor Questions Real Estate Students Ask

Who holds the title in a deed of trust?

The trustee holds legal title to the property until the loan is fully paid. The borrower (trustor) retains equitable ownership.

Is a trustor the same as a borrower?

Yes. In deed of trust states, the trustor is the borrower who signs the deed and secures the loan with property.

Can the trustor and trustee be the same person?

No, in most states, the trustee must be a neutral third party (often a title company or attorney).

Does the trustor own the property during the loan?

No, they retain equitable ownership, but legal title is held by the trustee.

Common mistakes to avoid as a trustor

Hey, people make mistakes, and that’s okay! But they can prevent some of them by taking these into consideration:

• Not Understanding the Foreclosure Process: Unlike traditional mortgages, deed of trust foreclosures can happen faster and without court involvement.
• Forgetting About Property Maintenance Requirements: Most deed of trust agreements require maintaining the property and keeping adequate insurance.
• Not Staying Current on Payments: Missing payments can trigger foreclosure proceedings more quickly than with traditional mortgages.
• Not Reading the Fine Print: Deed of trust documents contain important terms about default, foreclosure, and borrower obligations.

The bottom line

As a real estate student, understanding the trustor’s role in deed of trust arrangements is crucial for your exam.

Remember the key distinction: the trustor is the borrower who creates and signs the deed of trust, while the trustee is the neutral party who holds the deed as security.

Most importantly, never forget the golden rule about client funds: the agent or broker cannot hold client money in their personal account. They always have to use proper trust accounts and follow their state’s regulations to the letter.

Master these concepts now, and you’ll be much more confident when taking the real estate exam.

Want to learn more?

Real estate and trust terminology can feel overwhelming, but don’t let that stop you from mastering your real estate exam. Explore our glossary for a clear explanation of real estate terms.

You’ll definitely see trustor and trustee questions on your licensing exam, and understanding the difference will help you answer confidently.

That’s where Lexawise comes in. With Lexawise, you’ll learn all real estate jargon in no time! We’ve got explainer videos that break down complex concepts, audio lessons you can listen to anywhere, summary ebooks with all concepts organized and easy to review, plus interactive flashcards to test your knowledge.

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