Mortgage

The mortgage gives the lender a lien on the real estate and hypothecates it as security for the note. The borrower, who is the buyer of the property, is called the mortgagor. The lender is called the mortgagee.

If the borrower does not pay, the lender may go to court through a procedure called a judicial foreclosure, that is, foreclosure through the courts. In this procedure, he has the court sell the property and, out of the money obtained from the sale, take enough to pay the expenses of the foreclosure and pay off the debt.

Deed of Trust

When a deed of trust is used, an additional party called a trustee is brought into the transaction. The borrower, called the trustor, transfers “bare legal title” but nothing more to the trustee. The trustee holds this title for the benefit of the lender, who is called the beneficiary.

If the borrower does not pay, the lender directs the trustee to start a foreclosure. This non-judicial foreclosure involves the process of selling the Property to a third-party bidder or, in the absence of a sufficient third-party bid, the beneficiary acquires title to the Property. The foreclosure sale, in most cases, satisfies the debt.

If you need to direct the trustee to start a non-judicial foreclosure, you may or may not be able to recover the entire loan balance. For example, if a third party bids at a non-judicial foreclosure sale an amount equal to or greater than the amount which you are owed (including fees, costs, and expenses of the foreclosure) you would be fully paid.

On the other hand, if you bid the full amount that is owed to you, including all foreclosure fees, costs, and expenses (full credit bid) and there are no third-party bids, you will generally be limited to the Property and its value as the source of repayment of the outstanding balance of the note.
 

Land Contract

A land contract comes about in a situation similar to the purchase money deed of trust. Instead of giving a deed and taking back a promissory note secured by a deed of trust, the seller enters into a land contract with the buyer in which the buyer promises to pay for the land.

Ordinarily the buyer promises to pay in installments over a period of time. In the same contract, the seller promises to deed the property to the buyer when the purchase price is fully paid.

Dr. Ivan Terrero

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Learn about the legal structure many real estate investors are putting in place to protect their hard-earned money from frivolous lawsuits.