Do you live in a state that uses a Deed of Trust, a mortgage, or has the option of using one or the other? As a borrower you need to know the advantages and disadvantages of obtaining a Deed of Trust for your new home. How does it differ from a mortgage? This instrument is more risky than a mortgage for the borrower.
A Deed of Trust and a mortgage are both instruments to secure a debt for the lender when you finance your home. The main differences are that the Deed of Trust includes a “power of sale” clause and the instrument is between you the borrower, the lender and a trustee. A mortgage is between you and the lender.
If you make payments and pay the loan off, the trustee will convey the title to you. The power of sale clause begins if you find yourself in foreclosure. The trustee has authority to sell the property to obtain funds to payoff the lender. It is a speedy statutory process, usually thirty to sixty days, and no court is used. A mortgage foreclosure process is longer, as it is a judicial process and must go through the courts.
If your credit score is less than desirable lenders are more apt to lend to you.
- The Statutory Power of Sale clause has shorter time period for you to bring your loan current.
- The Due on Sale clause stops you from selling your home to a buyer who wants to assume your loan.
- Fall into foreclosure, and the trustee may sell your home.
- If you get a second loan against your home and the first lender finds out, they may call the Due on Sale clause and require full payment immediately, even if you're current with your payments. The first lender erases the lien of the second lender. The second lender may then sue you personally for his loan.
- No judicial courts are used, and you don't have recourse through the courts.
- You do not hold the title to your property, the trustee does.
- Usually there is no redemption period - the period of time after the foreclosure sale in which to obtain funds to get your home back.
The Deed of Trust is used in over 30 states, and when given a state option between it and a mortgage, lenders will usually use the Deed of Trust as it favors them and not you, the borrower. You should use a real estate attorney in these types of dealings.