subject: Deed of Trust vs. Mortgage Note to Secure Real Estate Financing [print this page] Deed of Trust vsDeed of Trust vs. Mortgage Note to Secure Real Estate Financing
A deed of trust is a legal contract used by banks to record details of real estate loans. It includes borrowers' names, principal amount, interest rate, installment amounts, payment dates, maturity date, prepayment penalties, and default clause.
A deed of trust is very similar to mortgage notes, with one major difference. When trust deeds are used the bank holds the property title until the loan is satisfied. With mortgage notes the borrower holds the title and banks issue a lien against the property until the loan is satisfied.
Another difference between deeds and mortgages is deeds include three parties which include the lender, borrower, and trustee. Lenders can refer to banks, credit unions, hard money lenders, or private funding sources such as the property owner or private investors.
When trust deeds are used lenders are designated as the beneficiary on property titles. In most cases, the trustee is the title company that insures the property during the sale process. Trustees are not involved with the loan process unless borrowers default on contract terms.
If loan default occurs the trustee issues a Notice of Default. NOD letters often require borrowers to pay the outstanding loan balance in full or face losing the property to foreclosure. The majority of banks do not expect borrowers to pay the loan off, but in order to keep the loan intact they must cure mortgage arrears.
In some instances, borrowers must apply for a loan modification or mortgage refinance to pay past due payments. Other options include deferred payments or mortgage forbearance which allows borrowers to skip a few payments without being penalized.
If borrowers are incapable of restitution the Trustee can sell the real estate without court approval. This is known as 'power of sale foreclosure' and repossession can be swift. This type of foreclosure often occurs within 60 days from the original date of the NOD letter.
People often fail to consider the ramifications of loan default when they buy property. However, loan default should be at the forefront when signing deed of trust contracts. Not only do borrowers lose property they also incur substantial harm to credit scores.
Banks and credit unions only enter into foreclosure prevention strategies if it is profitable for them to keep the loan intact. If lenders suspect borrowers are incapable of complying with loan default strategies or if keeping the loan intact is too costly they can deny borrowers' request to alter terms of the deed contract.
Although the foreclosure process is time-consuming and costly, there are situations that make selling the property through public auction more profitable than allowing borrowers to continue with the loan.
One primary benefit of securing financing with a deed of trust is if foreclosure does occur banks are prohibited from pursuing borrowers for deficiency amounts. If banks repossess property and sell at foreclosure auction for less than is owed on the loan, the bank incurs the financial loss. When mortgage notes are used, banks are allowed to pursue borrowers for deficiency amounts.
Unfortunately, borrowers cannot choose between mortgages or deed of trust because these contracts are governed by state. Presently, 29 states use deed of trust to finance real estate and the remaining 21 states use mortgage notes.
Industry experts predict that many states will begin using deed of trust so they can implement power of sale foreclosure and expedite the foreclosure process. With mortgage notes repossessing real estate often takes a year or longer and can be financially detrimental to lenders.
