Most of us are familiar with a mortgage. However, in many states, deeds of trust are used in place of mortgages and the role they play in the home buying process. But what is a deed of trust?
A deed of trust secures real estate transactions and includes three necessary parties: lender, borrower, and a trustee. The borrower receives money from the lender in exchange for a promissory note, and the trustee holds the legal property title until the loan is paid in full.
A deed of trust has many components that are similar to a mortgage and other components that work as a traditional property deed. Just like a traditional deed, a deed of trust has a detailed description of the property. This is called a property description. A property description describes what the trustor has rights to as long as they follow all terms and guidelines in the trust deed.
The agreed-upon purchase price of the home sans the down payment is the initial loan amount. The initial loan amount is what the lender is giving to the purchaser and is the exact amount that must be paid off at the end of the loan to dissolve the trust.
The trustee holds the legal title during the time the loan is being paid on. The role of the trustee is to be completely impartial when it comes to the deed of trust. As long as the loan proceeds the way it should the trustee has two possible options. If the trustor chooses to sell the property before the loan is paid off, the trustee pays the lender the proceeds of the sale that cover the remaining amount of money due on the loan. If the loan is paid off before the end of the loan, the trustee is responsible to dissolve the trust and give the trustor the legal title.
Do I have a Deed of Trust or a Mortgage?
The only major difference between a mortgage and a deed of trust that truly affect homeowners is when foreclosure is an issue. If you aren’t sure which was used to secure your loan be sure to review the documents you received at the time you closed escrow on your property. You can always contact your lender or call your local land records office. Although certain states use a deed of trust versus a mortgage, none use both. Deeds of trust are recorded in the same way mortgages are with the county clerk.
Mortgage Versus Deed of Trust
There are many similarities between these two loan assurances. In this article, we will break down some general information.
Why would you use a deed of trust? A deed of trust is used when traditional lending institutions are not being used. Certain states require homeowners to use a deed of trust instead of a mortgage. Regardless if you have a mortgage or a deed of trust their main purpose is to ensure the loan is paid in full. A mortgage involves only two parties, the lender and the borrower. A deed of trust includes a trustee who is responsible for holding the property’s title until the loan is repaid. In the case of default, the trustee will start the foreclosure process. In a mortgage, the lender is responsible for beginning foreclosure proceedings.
Be sure to take careful note of the terms outlined in the Closing Disclosure. These terms are where you will find particular differences between trusts and deeds and mortgages when it comes to foreclosure. In the event of the death of the trustor, a surviving spouse or family member can continue to keep making payments on the loan and take over as the trustor as long as they qualify.
With a traditional loan, lenders can impose certain restrictions and conditions in order for borrowers to qualify. Lenders may require the borrower to occupy the property as their primary residence for a specified period of time or pay mortgage insurance on the property. Be sure to discuss prepayment penalties with your lender.
There are little things borrowers need to be aware of when working with a deed of trust instead of a traditional mortgage. When it comes to foreclosures the process works differently. A deed of trust speeds up the foreclosure process because it is a nonjudicial foreclosure which means the courts don’t get involved. Acceleration and alienation are similar. An acceleration clause goes into effect once the borrower is behind on their payments. Depending on the terms of the acceleration clause it could happen after three months or even after just one missed payment. Depending upon the lender the borrower may have ample time to bring their payment current. An alienation clause is referred to as a due-on-sale clause. If the lender doesn’t want to have anyone who buys the property to assume the loan under current terms, they get an alienation clause in the deed of trust. These are a contractual language that ensures the borrower repays the loan when a sale or transfer occurs. Alienation clauses protect the lenders.
Deed of Trust or Mortgage? Which One is Best For You?
Deciding whether to use a mortgage or a deed of trust when buying your home depends on which state the property is located. For both a deed of trust and a mortgage the property serves as collateral in the case the borrower defaults.
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About: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.
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