Before you get financing for your home, you need to make sure you know the difference between a Security Deed and a mortgage. Having a basic understanding of what's involved can help you protect yourself and your real estate.
A Security Deed can have many names. In some cases, it's known as a Deed to Secure Debt,
Warranty Deed, or even a Loan Deed. It provides a full and direct legal title transfer from the borrower to the lender, leaving the equitable title with the borrower. The lender then provides the loan. The borrower makes payments, and until the payments conclude, he or she retains only the equitable right (a legal right guaranteed by equity, not from another legal source). During that time, he or she keeps exclusive right of possession and the right of redemption, meaning that the lender cannot sell the property's legal title unless the borrower defaults or they agree on the sale.
Depending on the state, a mortgage can be understood in two different ways. We must first understand the difference between a lien theory state and a title theory state. The buyer, in a lien theory state, owns the deed to the property during the term of their mortgage. A mortgage essentially secures the lender's rights and places a lien against the title of the property. The lien is removed once all loan payments have been completed. Examples of lien theory states include: Arkansas, Connecticut, Maine, and Wisconsin. On the other hand, the buyer does not own the title to the property in a title theory state. When a mortgage is signed, the borrower gives the title to the lender (i.e. mortgage holder) until all loan payments have been fulfilled. Mortgages, in title theory states, essentially achieve results similar to a security deed. California, Georgia, and Idaho are a few examples of title theory states.
The foreclosure process is one of the biggest differences between a security deed and a mortgage. It is typically much faster under a security deed than a mortgage. Under a security deed, the lender is automatically able to foreclose or sell the property when the borrower defaults. Foreclosing on a mortgage, on the other hand, involves additional paperwork and legal requirements, thus extending the process.
Aside from a Security Deed or mortgage, a loan may also be secured by what is known as a
Deed of Trust (or Trust Deed). The number of parties involved is the biggest difference between the three methods for securing a loan. For a Deed of Trust, the parties involved are the lender, the borrower, and a neutral third party who will serve as a trustee. The title of the property is held as security for the loan and held by the trustee for the benefit of the lender. The title is released from the trust once the loan is paid. Contrastingly, a Security Deed or mortgage only involves two parties, the borrower and the lender.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice,
please ask a lawyer.
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