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Real Estate Secured by Deed of Trust is More Vulnerable to Foreclosure

by Guest on Aug 18, 2012 General Property 2267 Views

A deed of trust is used to document information pertaining to real estate loans. Similar to a mortgage note, deeds record the names of property owners, borrowers, and lenders. They also record the amount of money borrowed, interest rate, amount and due date of each installment, maturity date, early payoff penalty, and default clause.

The primary difference between a deed of trust and mortgage note is lenders retain the property title until the loan is paid off. When mortgages are used the homeowner retains the title and lenders take out a lien against the realty until the loan obligation is fulfilled.

With mortgages there are two parties engaged in the transaction which include the borrower(s) and lender. When a deed of trust is issued there are three parties including the aforementioned, along with a trustee.

Trustees are generally the title company that provides insurance against the real estate throughout the sale process. The only time trustees get involved is if borrowers default on loan terms.

When loan default happens, trustees send a Notice of Default letter to borrowers that demand payment in full. If borrowers do not pay off the loan they could lose their realty to foreclosure. With that being said, most banks do not automatically enter into foreclosure, but instead give borrowers time to pay delinquent amounts.

If borrowers are incapable of curing mortgage arrears they might qualify for mortgage refinance or loan modification. Both borrowers and the property must meet eligibility criterion. If borrowers or their property do not qualify they might be eligible for real estate forbearance plans that let them miss up to three payments without having penalties assessed.

Borrowers that default on loans secured with a deed of trust need to understand that Trustees have the power to repossess real estate and sell it through foreclosure auction without interference from the court. This is referred to as 'power of foreclosure' and repossession can take place within 60 days from the date the NOD letter is issued.

When people buy houses they usually don't take into consideration what will happen if they default on their loan. The fact of the matter is loan default should always be considered when entering into deed of trust agreements. In addition to having property repossessed, borrowers that default encounter a substantial decline in FICO scores.

Mortgage lenders only offer foreclosure prevention alternatives if keeping the loan intact will be profitable. If banks aren't confident that borrowers will be able to comply with refinanced or modified loans, or if keeping the loan on their books will result in financial loss, they will deny borrowers' request to alter loan terms.

Engaging in foreclosure is costly and time-consuming for banks, so if they can keep the loan intact and make money they will opt to work with borrowers. On the other hand, if they can generate more money from selling real estate through auctions than borrowers will probably be unable to avoid foreclosure.

While foreclosure can be devastating there is a bright side to having realty secured by a deed of trust. Banks cannot pursue borrowers for the deficiency amount between the loan balance and sale price. If banks sell the property through an auction for less than the amount due they incur a financial loss. When mortgages are used banks can obtain deficiency judgments and hold borrowers financially responsible for the difference.

Borrowers aren't given a choice of the type of loan used to purchase real estate. This is governed by each state. Currently, 21 states use mortgage notes and the remaining 29 use deed of trust.

Many states that use mortgage notes are switching to deed of trust so they can expedite the foreclosure process under power of sale foreclosure. Repossessing real estate secured by mortgage notes usually takes close to a year and can be financially harmful to banks.

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