When looking to take out a home loan, your main financing option is usually a mortgage. However, you can also borrow the money via a deed of trust. Here’s a look at how a trust deed investment works in securing real estate transactions.
What Is a Trust Deed Investment?
A trust deed investment is a form of investment in a private home loan by one or more persons. This deal is protected by a trust deed, which is an agreement between the borrower (real estate developer or buyer), a lender, and a third-party trustee.
How Does a Deed of Trust Work?
To finance a real estate purchase via a deed of trust, the lender gives the homebuyer (loan borrower) the agreed loan amount. The borrower signs one or more promissory notes committing to repay the loan as per the agreed terms, including the principal and interest payable over a specific duration. As per the deed of trust, an impartial trustee takes custody of the legal title to the property.
The trustee, who can be an escrow, a title company, or bank, keeps the title as security for the promissory notes. The borrower retains the right to fully own and occupy the property during the loan period.
Once the borrower has repaid the loan in full, they then take full ownership of the title to the property. If they default, the impartial trustee assumes full control of the piece of real estate.
Are Trust Deeds a Good Idea?
Trust deeds can work for both the investor and borrower. If you’re a homebuyer, borrowing via a deed of trust makes sense when you’re unable to secure funding through conventional means. You’ll be getting your funding from private lenders that lend to people who may not otherwise get the funding they need to buy a home.
In most trust deed transactions, real estate brokers or mortgage brokers serve as impartial intermediaries. Be sure to engage trustees that are licensed by the Department of Real Estate. You can count on these professionals to help secure your real estate loan transaction. They can also match you with the right private trust deed investor for your specific home loan needs or terms.
Benefits to the investor include:
- You can expect a high return from your trust deed investment. These investments offer high-interest rates because they’re designed for borrowers with very few other financing options if any.
- You can also benefit from diversifying your investment portfolio and risk.
- There’s also the benefit of earning passive income during the loan period.
Disadvantages to the investor include:
- Your principal amount won’t appreciate.
- A deed of trust is not a liquid investment that you can convert into cash on demand.
- Parties with vested interests may exploit legal loopholes in a trust deed to the investor’s disadvantage. This can lead to costly legal disputes that may jeopardize the investment. If you’ve never invested in a deed of trust before, be sure to find credible third parties or trustees to help protect your interests.
Trust deeds are a viable lending option for homebuyers. For any help with real estate financing, contact or call the experts at Fidelity Mortgage Lenders at (800) 752-9533. We are happy to help you secure the right home loan for your needs.