Basics of Using a Deed of Trust to Finance Real Estate

A deed of trust is a legally-binding agreement utilized by lenders to document information regarding real estate loans. The contract contains names and contact information of all parties involved in the transaction, along with payment terms.

A deed of trust is comparable to mortgage loans with one significant variance. Any time a trust deed is utilized the lender retains title until the bank loan obligation is fulfilled. When mortgages are used, the mortgagor retains title and lenders place a lien against the real estate until the note is paid.

Further distinctions between deeds vs. mortgages are deeds consist of three entities including the lender, borrower, and trustee. Loan companies can be banks, credit unions, private investors, or hard money lenders.

When a deed of trust is established the lender is assigned as the beneficiary on the property title. The majority of time, the trustee is the title company insuring the real estate during the sale process. The trustee is never included in the loan process unless mortgagors go into default.

In the event of default, the trustee is in charge of filing a notice of default. NOD notices demand mortgagors pay the full outstanding balance of the loan or experience foreclosure. Most banks do not really require mortgagors to payoff the home loan, but do require they cure mortgage arrears to retain their loan.

Sometimes circumstances dictate mortgagors apply for a home loan modification or mortgage refinance to cure outstanding balances. Other alternatives include mortgage forbearance or deferred payments that let mortgagors miss a few installments without being fined.

Borrowers who are no longer capable of paying loan installments are allowed to sell property without court consent. This is referred to as 'power of sale foreclosure' and repossession of realty can be fast. This kind of foreclosure usually takes place within two months from the initial date of the notice of default letter.

Home buyers frequently fail to think about the consequences associated with loan default. The truth is loan default needs to be a strong consideration when entering into deed of trust agreements. When default occurs not only do buyers lose the real estate, they also encounter serious harm to their credit.

Banking institutions will only offer foreclosure prevention practices in the event it is financially worthwhile for them to maintain the loan. If banks believe mortgagors will be unable to comply with loan default remedies or if maintaining the loan is too expensive they can reject requests to modify deed contract terms.

Even though foreclosure proceedings are expensive and time-consuming, there are circumstances that make liquidating the property through foreclosure auction more profitable than letting mortgagors carry on with loan payments.

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The major advantage of obtaining financing using a deed of trust is if foreclosure does happen banks cannot go after mortgagors for deficiency amounts. When mortgage notes are utilized banking institutions can hold mortgagors responsible and obtain court ordered judgments to ensure restitution compliance.

Home buyers cannot select between mortgage notes or trust deeds because these agreements are governed by each individual state. At present, 29 states utilize deed of trust when financing real estate, while the remaining 21 states utilize mortgages.

Real estate experts forecast that the vast majority of states will institute the use of deed of trust so they can enter into power of sale foreclosure to speed up the process of foreclosure. When mortgage notes are used, real estate repossession usually takes nearly a year and is financially harmful to lending institutions.

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