A trust deed may also be referred to as a deed of trust. This is a document that is sometimes used in real estate transactions when one party takes out a loan from another party, in order to purchase a piece of property. A trust deed represents the agreement between the borrower and a lender to have the property held in trust by a neutral and independent third party. The neutral and independent third party holds the property until the loan has been fully paid off.
Trust deeds are less common than they once were, although twenty states still mandate the use of one instead of a mortgage when financing is involved in the purchase of real estate. The states include, but may not be limited to:
- North Carolina;
- Virginia; and
- West Virginia.
There are some states which allow the use of both trust deeds and mortgages. These states include but are not limited to Kentucky, Maryland, and South Dakota.
In a real estate transaction, such as the purchase of a home, a lender gives the borrower money in exchange for one or more promissory notes that are linked to a trust deed. This deed transfers legal title to the real property to an impartial trustee, as previously mentioned. An impartial trustee would generally be a title company, escrow company, or a bank. They hold it as collateral for the promissory notes.
The equitable title, which is the right to obtain full ownership, remains with the borrower. Full use of and responsibility for the property remains with the borrower as well. This remains throughout the loan’s repayment period. If the borrower defaults on the loan, the trustee gains total control of the property. Additionally, the trustee may then be authorized to sell the property so that proceeds may pay off any remaining debt.
What Is A Mortgage?
Generally speaking, a mortgage is a legal document that you sign when purchasing a home. This document gives the lender the right to take possession of the property if you fail to repay the loan according to the promised terms.
Mortgages can help people purchase a piece of property or a home, as well as provide refinancing options for the current property owner. When the purchase transaction occurs, the mortgage is generally filed in the county records where the property is located.
More specifically, a mortgage is a type of real estate lien that is placed on the property. This lien involves only two parties: the borrower, and the lender. This will usually be the prospective buyer (or, borrower) and a mortgage company (or, lender).
The borrower uses the loan in order to purchase the property, after which the borrower places the real estate lien on the property. If the borrower fails to repay the loan according to plan, the borrower may legally foreclose on the property and auction it off in order to pay off the debt.
What Is The Difference Between A Trust Deed And A Mortgage?
Mortgages and trust deeds are both instruments that are used by lenders in order to protect their interests when loaning money to an individual who is buying property. Mortgages and trust deeds create a security interest in the property that is purchased with the loan, in order to ensure repayment.
If the loan is not repaid, the security interest provides the lender with the right to recover what is owed. This is accomplished through a forced sale of the property. Although both instruments serve the same function, the two operate in a slightly different way.
Both are generally recorded as debt in the county in which the property is located. However, a mortgage involves two parties, while a trust deed involves three parties. As previously mentioned, the trustee holds title to the lien for the lender’s benefit; if/when the borrower defaults, the trustee will initiate and complete the foreclosure process upon the lender’s request.
The most significant difference would be that mortgages and trust deeds have different foreclosure processes. A judicial foreclosure is a court-supervised process that is enforced when the lender files a lawsuit against the borrower for defaulting on their mortgage. This process is generally time-consuming and expensive. If the foreclosed-property auction does not result in enough money to pay off the promissory note, the lender may file a deficiency judgment against the borrower.
This is an act of suing for the remaining balance. However, even after the property is sold, the borrower has the right of redemption. What this means is that they may repay the lender within a set amount of time in order to acquire the property title.
Alternatively, a trust deed allows the lender to commence a faster and less-expensive non-judicial foreclosure. This keeps the matter out of the court system, and adheres to the procedures that are outlined in the trust deed as well as state law. If the borrower does not make the loan current, the property is put up for auction through a trustee’s sale.
After the sale, the title transfers from the trustee to the new owner through the trustee’s deed. If there are no bidders at the trustee sale, the property reverts to the lender through a trustee’s deed. However, once the property is sold, the borrower has no right of redemption.
Finally, a trustee is responsible for paying the proceeds from the sale to the borrower and lender after the sale has been finalized. The trustee will pay the lender the amount that is left over on the debt, and will pay the borrower anything exceeding that amount. This is what allows the lender to purchase the property.
What Are The Advantages And Disadvantages To A Trust Deed Over A Mortgage?
As previously mentioned, some states only allow for trust deeds or mortgages; few states allow for the option of either. Both instruments are considered to be effective in instances in which the lender requires additional security for the loan.
However, deeds of trust may be more appealing to lenders. This is due to the fact that in the event of a default, the lender can sell the property without going through court. Mortgages, however, require the lender to file a claim in court to foreclose the property. If they are successful, the court will order a judicial sale of the property in order to pay off the remaining debt.
In terms of investing, investors generally prefer trust deeds. The investor lends money to a developer who is working on a real estate project, and the investor’s name is placed on the deed of trust as the lender. The investor collects interest on their loan, and when the project is complete their principal is returned in full. A trust deed broker is generally involved in facilitating the deal. Trust deed investors prefer this over a mortgage as it is a type of passive investment.
Do I Need An Attorney For Help With A Trust Deed Or Mortgage?
If you are considering purchasing real estate, or have the option between a trust deed and a mortgage, you should consult with an experienced and local mortgage lawyer.
An attorney will be most knowledgeable in terms of your state’s laws regarding trust deed vs. mortgage, and what your legal options are under those laws. They will also be able to represent you in court, as needed.