Both documents serve the same purpose in a real estate deal between a lender and borrower , but how they affect the relationship between the parties involved and the subject property is what makes the big difference .
Trust Deeds vs . Mortgages : What ’ s the Big Difference ?
Insight from Ignite Funding
What are the main differences between Trust Deeds and Mortgages ?
Number of Parties
If you are planning to invest in turnkey real estate development collateralized by real property , one of the top items on your due diligence check list should be to determine which mortgage theory the state follows per the location of the subject property . This understanding can be detrimental to your recovery strategy if your
borrower is unable to uphold their end of the deal and defaults on the loan . Each state adheres to either title theory or lien theory , though there are a few states that follow both . In title theory states , Deeds of Trust are the binding agreements utilized between lenders and borrowers , and Mortgages are the agreements utilized in lien theory states . Both documents serve the same purpose in a real estate deal between a lender and borrower , but how they affect the relationship between the parties involved and the subject property is what makes the big difference .
What are some similarities between Trust Deeds and Mortgages ?
Mortgages and Trust Deeds both secure repayment of the loan by placing a lien on the property , and are considered , by law , evidence of the debt as they are generally recorded in the county where the property is located . If the borrower defaults on the loan and the lien is in first position , the lien gives the lender the right to take the property back through foreclosure and sell it . In other words , both Mortgage and Trust Deed documents are used as leverage to ensure the borrower pays back the loan in full . The ability to sell the property gives real estate investors and lenders the potential to recoup the original principle lent on the loan . Depending on the value of the property , there is the potential for the recovery of back due interest , late fees , and even capital gain .
A Mortgage involves two parties : a borrower ( the Mortgagor ) and a lender or investor ( the Mortgagee ). A Trust Deed involves three parties : a borrower ( the Trustor ), a lender or investor ( the Beneficiary ), and the title company or escrow company ( the Trustee ). The Trustees main functions are to hold the title to the lien for the benefit of the Beneficiary and to initiate and complete the foreclosure process for the Beneficiary in the case of default by the Trustor .
Property Title & Foreclosure Processes
The main difference between Trust Deed and Mortgages is who holds the title to the property encumbered by the loan for the duration of the loan term . In a Mortgage State , the borrower holds the title of the property . Therefore , if the borrower defaults on the loan , the lender must go through the courts to take back the property through foreclosure . This is known as judicial foreclosure and this process involves the lender filing a lawsuit against the borrower . This can be a costly and timeconsuming process for both parties involved .
In a Trust Deed State , court can be bypassed because the Trustee holds the title to the property . You would follow the nonjudicial foreclosure process , which almost always results in faster execution and resolution for all parties involved , especially for the lender . The speed of foreclosure can be detrimental to minimizing carrying costs and getting the property on the market quickly to sell in what may be a more promising market than one met at a later date .
Both documents serve the same purpose in a real estate deal between a lender and borrower , but how they affect the relationship between the parties involved and the subject property is what makes the big difference .
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