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Understanding the Foreclosure Process: Deed of Trust vs. Mortgage

In today’s post, we’ll explore the essentials of the foreclosure process, focusing on two primary security instruments: the deed of trust and the mortgage. Understanding these can help you grasp how banks foreclose on properties.

The Basics of Foreclosure

When you buy a property with a loan, you typically sign several key documents:

  1. Promissory Note: This outlines who gets paid, how much, and when. It’s the agreement that you’ll repay the loan.
  2. Security Instrument: This can either be a deed of trust or a mortgage, depending on your state.
  3. Disclosures: These are the miscellaneous documents that make up the bulk of what you sign.
  4. Deed: This transfers ownership of the property to you.

Both the promissory note and the security instrument create a lien on your property. This lien is what allows foreclosure to happen if you default on your loan.

Security Instruments: Deed of Trust vs. Mortgage

The type of security instrument used can vary by state. It’s important to know whether your state uses deeds of trust or mortgages, as this affects the foreclosure process.

Deed of Trust

A deed of trust involves three parties: the borrower, the lender, and a trustee. The trustee holds the title until the loan is paid off. In the event of foreclosure, the process is typically non-judicial, meaning no court involvement is required. The state outlines a specific set of steps (X, Y, and Z) that must be followed. If these steps are correctly followed, the property can be sold at auction without a judge’s oversight.

Key points to remember:

  • Non-Judicial Process: No court involvement required.
  • Public Notice: A document is filed to inform lien holders and creditors of the pending auction.
  • Quick Process: Some states can foreclose within as little as 21 days.

Mortgage

A mortgage involves only the borrower and the lender. Foreclosure under a mortgage is typically judicial, meaning a judge needs to be involved. The lender must file a lawsuit against the borrower to get permission to sell the property at auction.

Key points to remember:

  • Judicial Process: Requires court involvement.
  • List Pendens: Public notice that a lawsuit is pending.
  • Lengthy Process: Can take six months to a year.

Key Differences and Similarities

While deeds of trust and mortgages result in the same outcome—the property being sold at auction and the bank recouping its money—the paths to get there differ significantly.

Deeds of Trust:

  • Faster process
  • No need for a judge
  • Follows a set of rules outlined by the state

Mortgages:

  • Longer process
  • Requires a judge’s approval
  • Involves filing a lawsuit

Summary

Understanding the foreclosure process is crucial for any homeowner. Knowing whether your state uses a deed of trust or a mortgage can significantly impact how quickly a foreclosure can proceed and whether judicial intervention is required. While both instruments serve the same ultimate purpose of allowing the lender to recoup their money through the sale of the property, the processes and timelines involved differ greatly. 

By familiarizing yourself with these differences, you can better navigate the complexities of foreclosure and take informed steps to protect your home.

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