A trust deed loan can give you the financial freedom and flexibility to grow your investment portfolio. As the name implies, this type of loan is secured by a real estate property through a document /contract called a Deed of Trust. The arrangement requires a neutral third party known as the trustee to hold the borrower’s property in trust until they pay off the loan.
Alright, enough with the technicalities. This comprehensive guide compiled by real estate financing experts at RTI Bridge Loans reveals everything you need to know about trust deed loans, including:
- The basics of a trust deed
- How trust deed loans work
- The elements of a trust deed loans agreement
- Trust deed vs. mortgage (similarities and differences)
…and much more. Let us get started.
Table of Contents
- » What is a Trust Deed?
- » How Does a Trust Deed Loan Work?
- » What does a Trust Deed Loan Include?
- » Differences Between a Trust Deed vs. Mortgage
- » Get a Trust Deed Loan in California
What is a Trust Deed?
Also known as Deed of Trust, a trust deed is an agreement between a lender, borrower, and trustee designed to secure a real estate loan transaction. The lender (beneficiary) gives the borrower (trustor) funds to purchase a real estate property in exchange for a promissory note, and the trustee holds the legal title to the home until the borrower pays off the loan.
The trustee is a neutral third party with bare or legal title to the property. Their primary responsibility is to auction the property when the borrower defaults on payments. They pay the sale proceeds to the lender to the extent of the unpaid debt.
What if the trustee is unable to sell the property? Then, they should give the property to the beneficiary. Some states mandate the use of trust deeds in real estate financing, while others offer the choice between the mortgage and trust deed. No state accepts a combination of both options. However, there are a few states that use other similar-sounding documents to secure loan transactions. For instance, security deeds in the State of Georgia.
How Does a Trust Deed Loan Work?
In a trust deed loan agreement, a lender finances a home purchase. The borrower (trustor) gives the lender a promissory note to guarantee that they will repay the loan. The promissory note highlights the trust deed loan terms, including the interest rate. The trustee holds the title to the property while the lender pays off the loan.
Based on the conditions defined in the trust deed, the lender can compel accelerated payment of the loan, take the property back, or have the trustee sell it. The lender keeps the promissory note, while the borrower only keeps a copy. It is marked as fully paid when the property buyer pays the trust deed loan entirely. Following defaults, the trustee has the authority and duty to sell the property.
That in mind, let us delve into the three parties to a trust deed:
In a real estate transaction, the trustor is the party whose official legal title to a property is put into the trust (put another way, the borrower).
The title specifies the actual ownership of the property. And while the title is held in the trust, you (as the trustor) still have equitable title to the property, provided you stick to the terms and conditions of the trust deed. That gives you the right to live in the property and gain equity even while repaying the loan.
The beneficiary is the individual or company whose investment interest is being protected. In most real estate transactions, it is the lender. The deed of trust serves as the beneficiary’s guarantee that the trustor will pay the loan off.
The trustee holds the legal title to the property as the trustor makes the loan payments. They should be neutral and not do anything that unduly benefits the rest of the parties.
When you pay off the loan at or before the end of the term, the trustee dissolves the trust and transfers the property title to you. When the trust deed loan enters default status, it is the role of the trustee to sell the property pledged as the loan collateral.
The borrower retains some rights during the foreclosure process. After the trustee files a notice of default with the county, the trustor has a particular time length (typically two weeks to four months) to reclaim the property by completing all required payments, including fees.
Foreclosure sales under trust deeds follow different procedures from judicial foreclosures, which have stringent parameters and higher accountability levels. Most states do not require judicial supervision for trust deed foreclosure sales.
Upon sale completion, the trustee distributes the proceeds between the lender and the borrower. The beneficiary receives the money needed to clear the debt, while the borrower gets the remaining amount.
What does a Trust Deed Loan Include?
A trust deed loan agreement must contain particular pieces of information to qualify as a legally binding document. The details include :
It is the amount of money the trust beneficiary lends so the trustor can purchase a property. Typically, the principal amount is equal to the home’s market value minus the down payment. The figure lets the borrower know exactly how much they should pay to pay off the debt and dissolve the trust.
Legal Description of the Property
A property’s legal description is not the street address but the official description on file with the county.
The standard option is the metes and bounds description, which defines the property’s boundaries identified by natural landmarks such as roads and rivers. Alternatively, the legal description can specify the subdivision’s official name, the block number, and the specific lot in question.
It is the time frame in which the trustor must pay off the loan. If you are negotiating with an individual, the loan length could be anything you both agree upon.
With traditional lenders, the period for trust deed loans ranges anywhere between 8 and 30 years, depending on the loan type and borrower’s financial capacity.
To save on interest, you can clear the debt before the end of the term. However, such a course of action is subject to the loan agreement terms.
You may need to fulfill specific requirements to obtain a loan through a trust deed. For example, the lender may require you to occupy the property as your primary residence for a certain period. Some may demand that you pay mortgage insurance for a particular duration or even throughout the loan term.
Ask about late payment fees, particularly the amount and when the payments become due. For example, the loan payments may be due on the third of each month, but the trust deed loan agreement may stipulate that the late fees be assessed if you fail to submit payments by the 15th of the respective month.
Prepayment penalties may apply. This policy subjects the borrower to a fine if they pay off the trust deed loan before maturity.
Power of Sale Clause
The power of sale clause authorizes the trustee to conduct non-judicial foreclosure when the borrower fails to meet their obligations under the promissory note and trust deed. That eliminates court involvement and speeds up the sale process, as long as the parties adhere to the terms outlined in the deed of trust.
Acceleration and Alienation Clauses
These clauses have different triggers but a similar impact on the trustor.
An acceleration clause becomes applicable when the trustor is behind payments. Depending on the terms, this clause may take effect immediately if the borrower misses a single payment or even after several non-payments. The lender pursues foreclosure proceedings if the trustor fails to pay off the loan within a duration specified by the acceleration notice.
Also known as the due-on-sale clause, the alienation clause takes effect when the lender wants to prevent anyone who purchases the property from assuming the loan under its present terms. The clause entitles the lender to full payment of outstanding loan balance and applicable fees and interest when the trustor sells the property and transfers the title.
Another trigger for the alienation clause is when the lender tries to put the property in an LLC. LLC’s limitation of liability might limit the lender from holding you accountable for the loan. That is why they could leverage the alienation clause to demand full loan payment before the transfer.
Differences Between a Trust Deed vs. Mortgage
We can organize the trust deed vs. mortgage discussion in similarities and differences between the two real estate arrangements.
- Neither is a home loan: Neither a deed of trust nor a mortgage is a home loan. You use a home loan to buy or build a new home – a property you do not own. In comparison, a mortgage or trust deal loan is a contract that places a lien on a property you already own.
- The lender can foreclose your home: Should you fail to fulfill your obligations defined by a deed of trust or mortgage, the lender is entitled to foreclose your home to recover their debt. The foreclosure may vary between the two loans, but the ultimate goal remains the same.
- Both are subject to state laws: State laws will dictate your lender’s choice of contract. In some states, only a trust deed is legally accepted, while in others, lenders can only offer mortgages. Some states like Michigan and Alabama allow lenders to choose between mortgage and deed of trust.
- Type of foreclosure: The foreclosure process varies depending on the type of contract. If you have a mortgage, your lender will follow a judicial process to recover the loan through a foreclosure. If it is a trust deed loan, the law allows the beneficiary to pursue a foreclosure without involving the courts.
- Foreclosure length and expense: It takes longer and more money to foreclose on a mortgage because the lender has to go through the courts. With a trust deed loan, the lender invests less money and time on foreclosing a home.
- The number of parties: A mortgage involves only the lender and borrower. Trust deed adds a neutral member to make the total number of parties equal to 3. The trustee is usually an escrow company whose attorney kicks off the foreclosure process when you default on the trust deed loan.
Get a Trust Deed Loan in California
Do you want to grow your real estate portfolio without financial constraints and stringent bank processes? Count on RTI Bridge Loans for reliable real estate financing in California.
Our extensive experience in trust deed investments allows us to offer a smooth and expedited trust deed loan process. This saves you time and money and gets you started with your investment at the earliest time possible.
Our company offers competitive rates and boasts a team of professional and experienced staff ready to guide you through every step of your investment journey. Also available are private money loans, fix and flip loans, hard money loans, and bridge loans. Call us today at 562-856-2285 and learn how our financing solutions can help you elevate and diversify your investment portfolio.
Trust Deed Loan FAQs
1. What is the Principal Amount?
It is the loan amount the trustor owes the beneficiary. Once the borrower starts making the payments, the loan balance becomes the Principal Amount.
2. Interest Adjustment Date vs. Maturity Date: What is the Difference?
The interest adjustment date is the date when the interest starts to accumulate on your loan. The maturity date is the date when the final payment of the loan balance becomes due.
3. What is an Annual Prepayment of the Principal?
It is an option that allows you to pay a percentage of the original principal amount each year before the maturity date. The arrangement can help you save a ton of money on interests and build equity faster.
4. Where Do I Get My Property’s Legal Description?
The County Recorder’s Office should provide the complete legal description of your property as long as you present your municipal address or tax parcel number.
5. Can I Sell a Property with a Trust Deed?
Yes, you can; however, you will require the lender’s approval. The proceeds from the sale will be used to pay off the lender, and you get to keep the remaining amount. The trustee ensures appropriate disbursement of the money.