Back to Education Center

Mortgages and Deeds of Trusts

When a bank loans an individual money to purchase a property, the amount of money the bank loans is called a first mortgage or first deed of trust. In order for trusts to be legal they must be recorded at the land records office. First trusts are paid off first if the property goes to foreclosure or is sold on the public market.

Depending on where you live will determine what the loan is called. Some states in the Northeast and Midwest have mortgages. The Mid Atlantic states, Southern states, and Western states usually have deeds of trust. Typically a mortgage is more difficult to foreclose upon.

Mortgages require a judicial proceeding where the bank must convince the court that the homeowner is not paying his monthly payments. The bank must get the courtÂ’s permission to hold a foreclosure auction.

It is easier for banks to foreclose on deeds of trust. A deed is simply a legal certificate transferring ownership of the property to the current legal owner. A trustee oversees the deed of trust. Typically the trustee is an attorney. The deed of trust does not give the attorney any rights unless the homeowner fails to make several payments according to the deed. At that point, the trustee can sell the property at a public foreclosure auction too pay off the bank's loan.

Second Trusts

Second trusts are commonly known as home equity loans and occur when a homeowner asks a bank to borrow money against their property. The bank usually will lend the homeowner money if the home has substantial equity in it and the homeowner has good credit. Many times homeowners take out a home equity loan to make improvements on their home.

How Trusts Get Paid In a Foreclosure

If there is a first and second trust on a property and the homeowner neglects to make their monthly payments the first trust holder, which is the bank, will likely start the foreclosure process. The first trust holder will set the opening bid at the foreclosure auction at the amount of the first trust. For example, if there is a first trust of $165,000 and a second trust of $35,000 the opening bid will be set at $165,000 by the bank. The first trust is only concerned about getting it's money not how much is owed on the second trust. If the property sells to a bidder for only $165,000, the second trusts losses their $35,000 because once an auction takes play all debts get removed even if they are not paid off. If the second trust comes to the auction they would bid in their amount, so likely they would bid $200,000 which is the total amount of both trusts. Remember, the first trust gets paid first so in order for the second trust to get paid the bid has to be equal to or greater than the amount of both trusts. The trusts do not want to end up with the property so they hope an investor bids higher than their opening bids.

Whenever there is trust on a home, either trust has the option to foreclose. The second trust can start the foreclosure process but the opening bid has to be set at $200,000 which covers both the first and second trusts. Second trusts are a bigger risk than first trusts since the first trust gets paid first with the proceeds from the foreclosure sale.