What is a Security Instrument in Real Estate?
A Security Instrument in real estate is a legal document that allows a property to be sold if the associated loan goes into default. This instrument gives the lender a security interest in the property, which means that if the borrower does not meet their loan obligations, the lender can gain possession and sell the property to recover the owed amount. Security instruments are critical in securing real estate transactions and come in various forms such as security deeds, mortgages, and trust deeds.
Types of Security Instruments
Security Deed
A Security Deed is a conveyance of legal title to real property as security for performance under a loan agreement. The borrower retains equitable title, while the lender holds legal title. Upon full repayment of the loan, the lender reconveys legal title back to the borrower.
Example: How Security Deed Works
Imagine you take a loan to buy a house using a security deed. In this scenario, the lender gets legal title to your property, whereas you keep access and the ability to use it. Once you repay the full loan amount, the lender transfers the legal title back to you.
Mortgage
A Mortgage is a loan in which real property is used as collateral. The borrower grants the lender a lien on the property as security for the loan. Unlike security deeds, with a mortgage, the borrower retains both legal and equitable title to the property.
Example: How Mortgage Works
Consider you purchase a home using a mortgage. You keep both the legal and equitable titles to your home, but the lender places a lien on your property. If you default, the lender can foreclose and sell the property to recover the loan amount.
Trust Deed
A Trust Deed, or Deed of Trust, involves three parties: the borrower, the lender, and a trustee. The borrower conveys legal title to the trustee, who holds it as security for the loan. If the debt is repaid, the trustee reconveys the title to the borrower. If the borrower defaults, the trustee can sell the property to repay the loan.
Example: How Trust Deed Works
You get a loan to buy a house using a trust deed, which involves you, the lender, and a trustee. The trustee holds the legal title to the property. Once the loan is fully repaid, the trustee reconveys the title to you. In the event of default, the trustee can initiate a sale of the property.
Frequently Asked Questions
1. What happens if I default on a loan with a security instrument?
If you default on a loan secured through a security instrument, the lender can initiate foreclosure proceedings with the goal of selling the property to recover the owed amount. Your specific rights and the process can vary depending on whether the instrument used was a security deed, mortgage, or trust deed and the regulations in your jurisdiction.
2. Can a security instrument affect my credit score?
Yes, defaulting on any loan secured by a security instrument can lead to foreclosure, which significantly impacts your credit score and remains on your credit report for up to seven years.
3. What are the benefits of using a security instrument?
For lenders, security instruments provide assurance that they can recover the loan amount if the borrower defaults. For borrowers, these instruments may lead to better loan terms such as lower interest rates, since the loan is secured by the property.
4. Can security instruments be used for any type of real estate?
Yes, security instruments can be used for various types of real estate, including residential, commercial, and industrial properties.
5. What should I consider before agreeing to a security instrument?
Before agreeing to a security instrument, it’s vital to understand the terms and implications, including the conditions under which your property could be sold. Consulting with a legal or financial advisor is recommended to ensure you are fully aware of the consequences.
6. How does a trust deed differ from a mortgage?
While both serve to secure a loan, a trust deed involves a third party called a trustee who holds legal title until the loan is paid off. In contrast, a mortgage grants the lender a lien on the property while the borrower retains legal title.
Related Terms: Deed of Trust, Lien, Foreclosure, Real Estate Investment, Home Equity.
