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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