What to Know about Trust Deeds

Deeds of trust, also commonly referred to as trust deeds, are a security instrument used between borrowers and lenders. Much like a mortgage or traditional home loan, the trust deed is a form of collateral agreement to pay a debt. In general, deeds of trust are used to pledge real estate as means of obtaining a loan. Unlike mortgages, however, the take back or foreclosure process differs. In some instances, trusts deeds are mandatory for obtaining financing.

What to Know about Trust Deeds

Most people are familiar with how traditional mortgages work. A borrower applies for a loan and in exchange for a promise to repay, along with interest paid, the lender provides financing. The real property purchased by the borrower is then collateral against the loan amount. If the borrower falls into arrears or cannot repay the loan, the lender begins the foreclosure process.

There are two types of foreclosures: judicial and nonjudicial. Depending on the jurisdiction, one or both are available to lenders.

A judicial foreclosure involves the civil court system. The lender must sue the borrower for the collateral (the real property) to repay part or all of the loan. If there is a deficiency, the lender might be able to sue the borrower for the difference to make up for the loss.

Nonjudicial foreclosure exercises one or more clauses of the debt instrument, allowing the lender to foreclose without going through the civil court system.

Deeds of trust work a bit differently. Instead of the real property being titled to the borrower, the collateral is assigned to a trustee. Said trustee keeps possession of the real estate collateral until the loan is completely repaid by the borrower. After the loan is fully amortized, the trustee relinquishes the title and the real property is titled to the borrower, who is now the unencumbered owner.

Much like a traditional loan, if the borrower goes into arrears and/or is unable to repay the loan, the lender is able to start the foreclosure process. Once the foreclosure process is completed, the lender takes title of the collateral property from the trustee.

Although there are differences between deeds of trust and traditional mortgages, there are more similarities. But, it is typically advisable to consult an attorney before entering into a trust deed.

In any instance, deeds of trust are a bit more complex and do involve different legal issues. Deeds of trust serve as a solution in certain circumstances. Depending on the situation, a trust deed might be used in conjunction with a mortgage or a standalone security arrangement. For help with Trust Deeds or Texas Hard Money Loans, contact us at http://proactivelendinggroup.com

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