Most potential homebuyers rely on some type of financing when purchasing a property because only a few people can afford to buy it in cash. Financing comes from a lender who lends the money for the real estate transaction, but they can do it in a few ways. The most common types of house financing are a mortgage loan and a deed of trust.
Deeds of trust are legal documents that play an important role in the house buying process and secure a real estate transaction. This agreement has three parties involved - the lender, the borrower, and the third unbiased subject that protects the assets and acts as a title holder until you pay off the loan.
A deed of trust secures the purchase, but it needs to include some features to be legally binding. It has many parts, but each trust deed has to have an initial loan amount that sets the exact amount of money a lender invests in that property. This is set by extracting the down payment from the house's selling price.
In addition to the loan amount, a deed of trust also includes the length of the loan and the loan requirements. The loan length decides on the time frame during which you would pay off the loan by monthly payments. The loan requirements differ according to each borrower's unique situation, but they specify the conditions that you must obey. For example, you might need to pay mortgage insurance, prepayment penalty, or occupy the property as your primary residence.
Of course, each purchasing and lending agreement must have a property description that goes into detail about the property and the rights that you, as a homebuyer, have regarding that property.
Furthermore, each deed of trust will have clauses that protect the lender from losing the money they invested. One of them would be an acceleration clause which is triggered by a borrower’s delinquency and serves as a foreclosure precaution.
Another clause refers to full repayment in case of selling the property, so the lender doesn’t risk the same loan terms for new owners. Above all else, the deed of trust explicitly and in detail explains the relation between the three parties involved in the real estate transaction.
As mentioned above, there are three key players in the deed of trust, all with their obligations and rights specified in the document. It involves a trustor (homebuyer, borrower), a beneficiary (lender), and an impartial trustee. Although an impartial party, a trustee works to protect the beneficiary's assets in case of borrower defaults or property sale.
The borrower is called a trustor because their assets - a legal title of the property - are put into trust. A trustor is the holder of the equitable title, which means that they have the right to occupy the house and earn equity with each payment but don’t legally own it until they have paid off the loan.
The lender is the beneficiary of the deed of trust because their investment is being protected. The document guarantees that you will pay back the money they gave you with interest. However, a beneficiary could be someone you signed a land contract with; it doesn’t have to be a lender.
Although the deed of trust requires a promissory note, the two are not interchangeable. A promissory note is a document that serves as a promise that the borrower will pay the debt. You officially become a legal homeowner when the debt is paid by receiving the promissory note stamped “paid in full”, and when the trustee forwards you a title.
A promissory note can be used in any loaning process; however, it is differently secured. A deed of trust secures the note using an impartial third party, while a mortgage leaves the lender to self-protect against the defaulting borrowers.
A mortgage loan is another form of real estate transaction security, which involves only two parties and no intermediates. The situation doesn’t change much for the borrower, in both cases, they would have an obligation to pay monthly installments to the lender, build equity in their home, and pay interest for the loan.
However, with a mortgage loan, the situation changes for the lender, as they would be responsible for starting the foreclosure process, whereas that responsibility lies with the trustee upon signing the deed of trust. Most differences between a deed of trust vs. mortgage loan lie when it comes to foreclosure, but each contract would be unique, so make sure you get familiar with the events in case of a default.
The foreclosure would depend not only on the contract that you signed but also on the type of foreclosure that is the common practice in your state. There are judiciary and non-judiciary foreclosures - one goes to the judge and the other lender deals with through public auctions.
A judiciary foreclosure might seem fairer, but non-judiciary is a much faster foreclosure process. Foreclosure is about taking the equitable title and striping you out of homeownership, so paying the monthly mortgage payments is of utmost importance.
Deeds of trust and warranty deeds are two types of agreements that deal with the title of the property. The key difference lies with the protected actor of those two agreements. While a deed of trust protects the beneficiary or the lender, a warranty deed protects the homebuyer. It is a document signed by the grantor and the grantee, or a seller and a buyer.
A warranty deed is created for the purpose of transferring the title of the property during a home sale from previous owners to the new owners. That document stands to protect you from any liens or future claims against the property you’ve just purchased.
An escrow holder can be a title company, so many people might confuse a deed of trust with an escrow. However, these two play totally different roles in the home buying process. An escrow is set to protect both parties equally, while a trustee looks out after the interest of the beneficiaries.
An escrow is a method of a real estate transaction in which a third party serves as a holder of assets until all obligations are fulfilled. If you were to buy a house and borrow money from the lender, an escrow representative would be making sure that you, the lender, and the seller are all playing fair and that no one is falling short.
California is one of twenty states that practice deeds of trust as a home buying financing tool, in place of a mortgage loan. On that list, you will also find Oregon, Washington, Texas, and North Carolina. These are also the states that use a nonjudicial and expedited foreclosure most commonly. Additionally, a deed of trust is a public record - you can record it with a county clerk and the process is the same in all these states.
There is a special advantage that a deed of trust has over a mortgage. It favors the lender and it refers to the power of sale or the public auction organized by the trustee and authorizes by the beneficiary.
The conveyance clause says that a borrower grants and conveys to the trustee the power to sell the property's title. The power of sale clause is not common with mortgages, but some lenders will include it in the Closing Disclosure if the borrower hasn’t quite proved their creditworthiness.
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