With banks tightening their lending rules after the last few years’ rash of foreclosures, more and more people are turning to private lenders as an alternative.
Banks consult the strength of your FICO score and your credit history to determine your trustworthiness. They then loan you, or refuse you a loan, accordingly. Alternative lenders, on the other hand, focus on the value of your collateral, but they also take precautions. The deed of trust is the document that helps makes sure that their funds get repaid. A deed of trust functions much like a mortgage in many ways. In some way it differs. Here’s how:
What is a mortgage or a deed of trust?
When someone is looking to buy a house, or any sort of property for that moment, almost inevitably they’re going to look for a loan. (After all, few can afford to fund out of pocket). The mortgage or the deed of trust are not the loan. They are the forms that the broker/ lender and borrower sign (maybe in the presence of a second or third party) that guards all aspects of the transaction. The lender signs that he is giving money for and under certain conditions and towards a certain end. The borrower signs that he will protect this money, uses as stated, and repay following the lender’s terms and schedule. This is called the underwriting process. The bank (or traditional lending association) investigates credit history to see whether the banker should give the applicant this mortgage. The alternative lender looks at the value of the property to see where he will get a profit from this transaction and, if so, proceed with granting the funds. At the end of it all, the note that the borrower signs promising to repay is called the omission note (think of an IOU). The mortgage or trust is the document that pledges the property as security for the loan. It is this that is used to permit foreclosure if the borrower defaults.
Mortgage vs. deed of trust: Similarities
Essentially the mortgage and deed of trust work the same way in that both put a lien on the property. In other words, both lenders – the bank and the trust deed investor – stipulate that they are holding onto the property. Put in other words that the property is their collateral or trust. If the borrower fails to make payment in total or part, the lender uses the borrower’s property for repayment.
Mortgage vs. deed of trust: Differences
The two major differences between a mortgage and a deed of trust constitute in that: (a) the number of people/ parties involved and (b) the consequences when the borrower defaults.
- Number of parties involved – A mortgage has two parties: lender (Trustee) and borrower (Beneficiary). A trust deed has a third party who stands in as escrow. This escrow party is the one who holds onto the title of the property until the loan is repaid. If the loan isn’t repaid, the trustee – often times an escrow company – is responsible for starting the foreclosure process.
- What happens when the borrower defaults? – In the case of bad loans, it seems as though the deed of trust situation favors the borrower rather than if he had gone the mortgage route. In a mortgage, if the borrower can’t pay, he and lender carry the whole process of foreclosure and selling of property through the courts in what is known as a judicial process. This is notoriously time consuming and costly for both borrower and lender. The borrower has it easier in the deed of trust scenario where courts are bypassed. Instead, each state specifies its own conditions, and these terms and procedures are laid out in the deed of trust. In short, procedures are almost always faster and less costly than they are with the traditional mortgage.
How do you know when you have a mortgage or a deed of trust?
Whether you have one or the other depends on whether foreclosure is an issue. How did you set up your loan? Did you go through the traditional channels, namely a bank or credit union? In that case, they consulted your FICO scores and background and issued you a loan based on that. Your loan is a mortgage. It likely took a long time – 60 days at the very least – and you, no doubt, had to file tons of paperwork and had to endure a complex inconvenient underwriting process.
If you had little or none of that, you likely went the trust deed route. You approached someone who assessed the value of your property (not your history, or maybe something of your credit past). He lent you money almost immediately and you completed little paperwork. The process was convenient, effective, smooth – and far more expensive. That type of loan was based on your collateral and is called a deed of trust.
Does this help you?