Table of Contents
- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
Introduction to Deed of Trust
When you are buying a new home you have a lot of documents to sign when you are closing on a home.
One of the documents that you might have in that bunch of documents is a deed of trust.
When it comes to trust deeds it is issued depending on the state you are buying the property in. In this post, we will understand what is a deed of trust in detail.
What Is A Deed Of Trust?
A deed of trust is somewhat like a mortgage. It is a legal document used to pledge real property as collateral to secure a loan.
With a trust deed, an individual who is planning to borrow money would pledge title to their home in trust to secure the repayment of the loan to the lending party.
And like other deeds that transfer title, the deed is recorded against the property to show that the borrower has pledged it as collateral for their loan, hence it is called the deed of trust or trust deed.
It is a deed placing property in trust to secure the repayment of the loan.
How Does The Deed Of Trust Work?
The property is deeded by the Trustor; this simply means that the borrower transferred the title to his property to a trustee, which is typically a third-party and is often a servicing agent, a title, or an escrow company.
The third-party (Trustee) holds the property in trust for the beneficiary who is the company or individual lending the borrower money to buy the property.
Now, you have a loan that is secured by a property, and the third-party trustee that holds the title for you until you get paid pack.
What happens to the title when the loan is paid back? When the loan is fully repaid, the borrower will request the trustee to return the title by what is called a reconveyance in which the title of the property is reconveyed back to the borrower.
But what happens if the loan is not being repaid by the borrower? If the loan becomes delinquent the trustee on behalf of the beneficiary or the lender of the money can file something called a notice of default.
And if the loan is not brought current, the beneficiary or the lender can demand that the trustee can foreclose on the property so that the lender may be repaid either from the sale of the property at the trustee sale or by attaining title and possession of the property because it did not sell at the trustee sale.
What Is The Difference Between A Deed Of Trust Vs Mortgage?
A deed of trust is used in some states instead of a mortgage when a purchaser buys a property using borrowed funds.
The trustee holds the title of the property for the lender till the loan is paid in full and transfers the title to the borrower once paid in full. If the loan is not paid, the trustee will foreclose on the property on the lender’s behalf.
Whereas, a mortgage is an agreement between a borrower and a lender that gives the lender the right to take the property if the borrower fails to repay the borrowed funds.
As with the trust deed, once you take out a loan, you will sign a promissory note at closing also sometimes called a mortgage note, but the note will be secured with the mortgage deed rather than a deed of trust.
The key difference is that a mortgage does not transfer a legal title to a trustee but rather places a lien on a property.
In the case of a deed of trust, the borrower will typically face a non-judicial foreclosure on non-payment of the loan because the legal title is held by the trustee a lender does not necessarily need o go through the courts to foreclose on a property.
However, in the case of a mortgage, the lender needs to go through court for foreclosure. Based on whether the lender and borrower agree to a trust deed or a mortgage, the cost and time taken for foreclosure are determined.
The other difference is that the mortgage included only two parties the lender and the borrower, whereas, the deed of trust includes three parties, the Trustor, Trustee, and beneficiary.
What Is The Similarity Between A Mortgage Vs Deed Of Trust?
Neither a deed of trust nor a mortgage is a loan. A loan is something that you agree to pay back to the lender and its terms are usually outlined in a promissory note.
Instead, both the deed of trust and a mortgage are contracts that allow the lenders to sell or take the property if the borrower defaults on the loan.
So in other words, both the deed of trust and a mortgage provide a way for a lender to repossess a property through foreclosure.
They both trust deeds and mortgages are dictated by state laws. Most states stipulate that lenders must use one or the other although a few states allow both.
Conclusion
Whether you as a borrower agree to a deed of trust or a mortgage, both serve the same purpose.
It is just that the way mortgages and trust deeds are structured and their functionality is different.
In both cases, if the borrower fails to make the payment will result in foreclosure of the property.
Hence for the borrower, it means the same to have a deed of trust or a mortgage for buying a property.
