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The laws governing trust deed investing will vary depending where the property is located, but there are some things that are important to know regarding how those transactions are handled. Before you contact a broker or hard money lender to discuss this type of transaction, both investor and lender need to be aware of any existing regulations that govern trust deed transactions.

Deed of Trust vs. Mortgage

While there are similarities between deed of trust investments and mortgages, there are also some very important differences regarding the parties that participate in the transactions, the title holder and the foreclosure process.

A mortgage involves two parties: the borrower and the lender, but there are three parties involved in a deed of trust: the borrower, the lender and a trustee. The trustee is a disinterested third party in the transaction that holds the title until the borrower repays the lender/investor. The laws among states determine who is eligible to be a trustee. In some states lawyers are permitted to act as trustees while other states require the assistance of title companies.

Because trust deeds are much simpler than traditional mortgages investors find these security instruments quite lucrative. Since trust deeds have nearly replaced traditional mortgages in some states, borrowers have a larger selection of lenders from which they can choose. For some borrowers the idea of working with a private lender is much more attractive than dealing with a large bank or mortgage company that knows nothing more about them than the account number they represent in the accounts receivable journal.

Is the Choice Yours?

Homeowners do not get to choose which security instrument secures their home loan. This is a decision that is determined by the law in effect in the property’s location; it is up to the borrower to confirm which security instrument is in effect in that state. You will also want to know whether the theory used is title or lien. When you possess this knowledge it will be easier for you to understand the relationship that exists between all the parties involved, who has the title to your property during the loan term and how the foreclosure process works if you should happen to fall upon hard times and are unable to make the payments on the trust deed loan.

Regulatory Variations

The most important thing to understand about the regulating trust deed investments is states have their own laws with which you must become familiar. What works in one state may not work in another, so you cannot make any assumptions based on your experience in another state as either a borrower or trust deed investor. It is advisable to familiarize yourself with the laws in any state you plan to do business at any point in the immediate or near future. Being prepared ahead of time will help you avoid any surprises and delays in processing a trust deed investment; from a borrower’s viewpoint you will understand how the closing process works and how quickly you can expect to take obtain the funds you need to borrow against the equity in your home. A properly executed trust deed investment is profitable for both borrower and lender.