What is the best arrangement for a lender and a buyer where real property is concerned? A mortgage and a deed of trust are both agreements tied to real property. Property that is tied to either type of agreement consists of a lender and a borrower. Mortgages and deeds of trust have their share of similarities but are different in many ways.
What is a mortgage?
A mortgage has two involved parties. The buyer that holds the mortgage is referred to as the mortgagee or lender. The institution is referred to as the lender. The debt itself is documented as an official lien on the real property. The home secures the debt, acting as collateral. The mortgage is actually documentation used to create an official lien on a piece of property.
What is a deed of trust?
A deed of trust consists of a lender, trustee and a borrower. The trustee acts as an intermediary between the borrower and the homebuyer. The lender provides money to the borrower for the purpose of acquiring a property. Once the funds are available, a promissory note is created, which discusses the obligations of the borrower and repayment terms. The borrower’s property remains in the hands of the trustee until the terms have been satisfied.
What is the difference between a mortgage and a deed of trust?
Some states use either form of documentation to refer to a lien on a property. The main difference between the two is that there are three parties involved in the real property agreement when there is a deed of trust. There are only two main parties involved in a mortgage scenario. A court action is required to take action if there is a default or breach of contract. The action taken is judicial foreclosure. If there is a breach of contract in a scenario where the deed of trust is used, court action isn’t a requirement. This is referred to as non-judicial foreclosure. The court has to grant authorization in a judicial foreclosure to sell the property. In the case of a non-judicial foreclosure, the trustee already has the rights to sell the property. The trustee has more rights to seize and sell the property when a deed of trust is used. The mortgage framework requires court involvement to grant those rights to the lender. Foreclosures are faster with a deed of trust agreement.
Why are deeds of trust used?
Some states use only the mortgage as documentation for interest in a given property. Other states use the deed of trust method with a trustee. Some states permit the use of both, leaving it to the involved parties’ discretion. The mortgage process is court-driven and in the best interest of the borrower in that there are steps that must be taken to seize the property. The deed of trust arrangement suits the lender because the trustee can cheaply and quickly foreclose on a property if there is a default.
The deed of trust and the mortgage both permit foreclosure if the agreement is breached and the loan reaches default status. The foreclosure is expedient with the deed of trust agreement. The mortgage agreement cuts out the intermediary, making it an arrangement to be handled exclusively between the institution and the borrower.