Mortgages and deeds of trust serve the same purpose in different ways. These mutually exclusive home-financing arrangements can be found in different states in the United States and are designed to help individuals, families and investors to purchase real property. The differences between mortgages and deeds of trust are more pronounced for lenders than borrowers.
A mortgage is a specialized home loan extended by banks to home buyers. Real estate brokerages often work directly with mortgage lenders to help their clients with financing. In a mortgage arrangement, the lender extends the full amount of the loan up front, which is then forwarded to the seller of the property. As the borrower makes payments to the lender over time, the lender retains the title to the property. The borrower, however, retains the right occupy and generally control the property throughout the life of the loan.
Deed of Trust
A deed of trust differs from a mortgage in distinct ways. Deeds of trust require three parties to the transaction at all times. One is a seller who receives regular payments from the borrower, the second is the borrower who makes the payments, and the third is a third-party trustee who holds title to the property in good faith for the other parties. When the full amount of the purchase price has been paid, the trustee transfers title to the borrower.
Role of the Trustee
In addition to holding the title to the property for the buyer and the seller, trustees in deeds of trust have specific responsibilities. The trustee is responsible for filing a deed of release upon completion of the loan and handling the legal process of transferring the title. Trustees are also responsible for giving notice of default to borrowers. Unlike mortgage lenders, who must take borrowers to court to obtain eviction judgments, trustees are simply required to publish a notice of default in a newspaper for 21 days, after which time they have the right to sell the property and repay the original seller.
Mortgage contracts and deed of trust agreements contain many of the same provisions. Each agreement sets forth the vital information for the loan, including identifying each party to the transaction and the real property in question, as well as setting forth the loan amount, interest rate, maturity date and any fees, penalties and dispute resolution methods.
Not a Choice
After becoming familiar with the differences, home buyers may ask themselves why anyone would choose a deed of trust over a mortgage loan. Unfortunately, the decision is not up to either buyers or lenders. Different states allow the use of either a deed of trust or a mortgage, but never both. In Arizona, for example, home buyers must use a deed of trust. In Florida, on the other hand, buyers must use a mortgage. Follow the link at the end of this article to find a list of allowed loan types by state.
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