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Foreclosure – Deed Of Trust Vs Mortgage
One big factor that determines an investor’s success in the foreclosure marketplace is how well he knows the process of foreclosure.
Having in-depth knowledge of the ins and outs of the process will help the investor identify not just where and when to take action. But also the best time to take action.
If you are new to this, it is best to minimize risks as much as possible.
Every state have their own laws regarding how the foreclosure process proceeds.
This means that one strategy in one state that works very well might not work in another.
However, they can generally be put into two categories of how real estate loans are secured.
- Deed of trust
Most state use either one of the two for documenting the majority of loans. While some even use a combination of both.
So before you go forth and devour hours sieving through foreclosure listings in state, do identify whether that state practices deed of trust or mortgage.
This can be done by calling up a title company or real estate attorney in that area.
While the two are different in name and technicality, the role they play in real estate is essentially the same.
That is to legally secure a loan to a borrower.
Deed of trust
A deed of trust is an agreement between 3 parties namely the:
- Borrower (trustor)
- Lender (beneficiary)
- A third party trustee chosen by the lender
When a borrower signs up for a loan in a state that uses deed of trust, he signs a deed of trust document that passes the legal title of the property to a trustee for the lender’s benefit.
When all is said and done, the borrower will acquire control of the property with all the rights of an owner.
However as the loan has yet to be fully paid up, the title is still with the trustee.
This means that even though the borrower is the “owner” of the house, he has to take great care in not putting the lender’s interest in the house in danger.
At the same, should the borrower default on payments, the trustee may proceed with foreclosing the property.
The process of foreclosure in such states goes through a trustee’s sale of the property in question.
Also known as a nonjudicial foreclosure, the process does not occur in a courtroom before a judge.
Following the rules of foreclosure in the state, the trustee’s final stage in the process is to run an auction for the sale of the property for the benefit of the lender.
The first difference between a mortgage and deed of trust is that a mortgage only consist of 2 parties.
- Borrower (mortgagor)
- Lender (mortgagee)
There is no requirement to appoint a third party trustee to ensure the lender’s interest is protected.
This is because lenders do that job themselves.
When a borrower defaults on the payment terms as stipulated in the promissory note, the lender will have the legal right to proceed with a judicial foreclosure on the property.
As you might have guessed, it’s called a judicial foreclosure instead of a nonjudicial one because it take place in a courtroom headed by a judge.
The time frame of foreclosures in mortgage states are generally longer than deed of trust states.