One of the alternative ways to obtain real estate financing is the Deed of Trust. This type of financing is particularly useful in cases where the banks have tightened up the lending rules as has happened in recent years. Other cases include borrowers not wishing to submit to the entire process of qualifying for a traditional mortgage. If you are familiar with the process involved in qualifying for a traditional mortgage you already know that it can take weeks of your time and countless documents are required making this path a very intrusive headache.
Deed of Trust vs. Mortgage
While a deed of trust is in many ways similar to a traditional mortgage, there are some important differences between a deed of trust and a mortgage that are worth consideration. Also, the actual loan is still simply a loan. These two terms, deed of trust and mortgage, both represent the documents required to secure the loan.
How a deed of trust and a mortgage are similar:
- Both represent the documentation needed to secure a real estate loan.
- Both secure a lien on a piece of property for the lender, so that the lender has the right to sell the property if the borrower defaults on the loan.
This is how a deed of trust and a mortgage are different:
- With a mortgage, the borrower and the lender are are involved in an exclusive agreement and no other parties are involved.
- With a trust deed, a trustee is involved as well. The trustee’s duty is to hold the title until the loan is paid in full. If the loan defaults, it is the trustee’s duty to begin the process of foreclosure.
- The biggest difference between a mortgage and deed of trust is how the foreclosure process begins after a borrower defaults.
- Mortgage Foreclosure: With a mortgage, the process must go through the courts. The lender must file a judicial foreclosure lawsuit, and the process is very expensive.
- Deed of Trust Foreclosure: With a deed of trust, the process is much simpler. The courts are typically not involved, giving the trustee the power to begin the process, which makes the entire process of foreclosing on a property with a deed of trust much simpler and easier for lenders.
**Note: The exact foreclosure rules depend upon the state, and deeds of trust are not allowed in all states. On a reverse note, there are some states where only deeds of trust are allowed, and they do not allow mortgages. That means that many people may refer to the documents securing their home as a mortgage, but they may legally actually be deeds of trust.
The Advantage of Deeds of Trust for Lenders
The advantage of a deed of trust should be pretty clear. However, even though a deed of trust foreclosure does not need to be resolved through the courts, borrower’s still have many rights which are different from state to state.
Typically, the terms of a foreclosure are outlined in the original contracts. Even though a deed of trust does not require a foreclosure through the courts, borrowers still have legal recourse if the lender violates the contract.