Property Is Security
When someone obtains a loan to buy real estate, the property he purchases becomes security for the loan. That means the property guarantees the debt. Before money changes hands, the borrower must sign security instruments, documents that give the lender the right to take the property back if the loan conditions are not met.
Over half of the states in the United States use mortgages as security instruments. The other states use a deed of trust, which serves the same purpose, but with a few important differences. Why should you care? One type of security allows a lender to move through the foreclosure process at a faster pace and with less cost. When you're dealing with an owner who's nearing foreclosure, it helps to know how it will be accomplished and how much time they have to negotiate a contract and sale.
Mortgages
Many people don't see a difference between real-estate loans and mortgages, but a mortgage is not a loan, and it is not something that a lender gives a borrower. A mortgage is a security instrument that creates a lien on the property being purchased, and the lien is the lender's security for the debt.
What is a lien?
A lien is a legal claim against a property that usually must be paid when the property is sold. Liens are recorded in public records so that anyone researching a property's deed is aware the debt exists.
There are two parties to a mortgage. The borrower is the mortgagor; the lender is the mortgagee. Even though a loan is secured by a mortgage, the borrower owns full title to the property — no one else has any rights of ownership. In order to foreclose, the lender must usually progress through the court system to prove it has a right to take the property.
The Deed of Trust
A deed of trust is a special kind of deed that gives someone a limited interest in a borrower's property. Like a mortgage, the deed of trust is recorded in public records, where it notifies everyone that there is a lien on the property. The deed of trust involves three parties: the borrower, who is the trustor; the lender, who is the beneficiary; and the third party, who holds a partial interest, is the trustee.
The trustee is someone who holds temporary, limited title to a property by way of the deed of trust and is responsible for releasing the deed of trust when the lien is paid. The release shows up in public records to notify anyone who is looking for information that the debt no longer exists. Documents are in place to ensure that a trustee cannot take the borrower's property for no reason.
The trustee must be a neutral third party, someone who will not favor either the borrower or the lender if problems develop with the loan. In some areas attorneys act as trustees, while in other areas title insurance companies provide the service.
The deed of trust gives the trustee the power to sell the property at auction if the lender gives the trustee proof that the borrower has not complied with the terms of the loan. The trustee progresses as allowed by law and as dictated by the terms in the deed of trust. But the process bypasses the court system, making it a much faster and cheaper way for the lender to foreclose when compared to a mortgage foreclosure. A property owner with a deed of trust might not have as much time to negotiate with you as an owner with a mortgage.
