YOU ASK:

Deed of trust vs. Mortgage: What does each of this mean and how do they apply with regards to my loan?

WE ANSWER:

When you are trying to get a loan to buy a piece of real estate property, you may either be required to sign a mortgage or deed of trust. These two may act as security instrument, where you, as a buyer are promising to pay the loan or else face consequences, such as a negative credit rating and foreclosure of the property.

With a mortgage:

  • The borrower agrees with the lender to secure the debt on his home.
  • The details of the contract are documented in public records, including the lien created.
  • The lien states that the property cannot be fully transferred to the buyer/borrower unless full payment of the debt is given.
  • Then, the bank will release the lien
  • With a mortgage, the holder of the title may either be the bank or the borrower, depending on what is customary in that state
  • When the borrower defaults on the loan, the bank may sell the property in an attempt to recover the funds (or the remaining portion of it) they loaned.
  • Foreclosure is done after the bank goes through a court action and a judgment in favor of the bank is given

The deed of trust basically works the same way as the mortgage, but with some key differences. With a Deed of Trust:

  • There is a neutral third party - the trustee - involved. The third party is the one who holds the title until such time as the debt is fully paid.
  • A trustee may either be a title company or an attorney.
  • The advantage of a deed of trust is that it is simpler to foreclose and will take less expense and effort as compared to a mortgage.
  • In the event of the delinquency of the borrower, all the bank has to show is proof that the borrower has indeed defaulted on the loan and then the bank will initiate foreclosure proceedings. The bank does not need to go to court to foreclose.
  • The trustee has the right to sell the house in behalf of the bank.

As a borrower, you don't get to choose which instrument to use. This really depends on the state where the property belongs.

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