Deed of trusts are probably one of the safest investments you can make that offers you a high return, but what exactly is a trust deed?
A trust deed, or deed of trust is a document that is used to secure the debt on a home acting as a mortgage. A trust deed is recorded as a lien on real property. However, although a deed of trust acts like a mortgage, it is important that you understand there are differences between a mortgage and a deed of trust.
The fundamental difference between deed of trusts and mortgages is the utilized procedure that is followed if the borrower neglectes his or her obligation to pay off the loan and breaks the agreement.
Concerning mortgages, if a borrower “defaults”, such as by failing to make monthly payments or meet other conditions of the loan, such as carrying homeowner’s insurance and maintaining the house in good repair, the lender have to bring a court action in order to foreclose on the property. Nevertheless with a trust deed, if the homeowner does not pay the loan, the foreclosure process is usually much faster and less complicated than the formal court foreclosure process.
A trust deed is used as security for a loan on real property, and the specifics regarding the loan are written in a promissory note. A deed of trust is then documented at the county recorder’s office to legally notify the world that the property in question has now been pledged to secure a loan.
There are three parties involved in a trust deed:
1. Beneficiary – Investor/Lender/note holder
2. Trustor – Borrower
3. Trustee – Third party selected by the investor who has the legal power to act on the behalf and hold title until the note has been paid.
When making a trust deed investment, the deed of trust recorded against the borrower’s property title is what secures the lenders investment. When making an investment in a deed of trust, the trustor (borrower) makes the property transfer, in trust, to the trustee (independent third party). The trustee then holds the conditional title on the behalf of the beneficiary investor/lender/note holder), and then either of the following takes place:
1. The trust deed will be returned to the borrower once they satisfy all of the terms and conditions that were outlined in the promissory note.
2. The property will be put up for sale should the borrower default – also known as foreclosure. Foreclosure is the process that is taken by the investor in order to sell the property to a bidder from a third party, or to obtain title to the property. Usually the foreclosure sale satisfies the debt that is owed to the investor.