What Is An All Inclusive Trust Deed? It’s a common misconception that a mortgage is the sole formal document facilitating the purchase of a home. While mortgage deeds are certainly the most common, the rise of alternative home loans such as seller financing has also enabled other instruments of securing a home loan. In particular, deeds of trust.
A deed of trust allows a lender—typically a private third party (also known as a trustee)—to take possession of a property should a buyer default on loan payments. They’re not used in place of a mortgage deed; actually, far from it. Instead, they’re used as a security instrument to ensure both primary and any secondary mortgages can be paid off in full, with the legal right of the deed being transferred only upon successful completion.
But what is an all inclusive trust deed? How does it affect homeowners considering selling their property?
All Inclusive Trust Deeds And Owner Financed Loans
An all inclusive trust deed (or AITD) is a document secured by a promissory note which combines multiple loans (in this case, primary and junior mortgages) into a single security instrument. AITDs are used primarily in conjunction with a wraparound mortgage during an owner financed sale of property for the sake of convenience; in fact, they’re also known as wraparound deeds for that very reason.
In an AITD loan, the buyer typically makes one large sum down payment which is divided between the original lender and the seller financing the loan. The buyer then pays the loan on an installment basis, just as they would a traditional mortgage loan; only with additional fees and interest rates, typically dictated by the seller’s terms.
One of the chief benefits to an AITD is preservation of an existing mortgage—and subsequently, a seller’s credit. If an initial mortgage was obtained at an advantage to the seller, they can still pay their initial interest rates while making a subsequent profit from increasing the interest to a new buyer (who may typically have less than ideal credit.) Not only that, but loans in which payments are made in excess of interest can help to build equity much more quickly.
All Inclusive Trust Deeds And Risk
The most notable risk associated with an AITD is the same risk facing any seller financed loan; buyers defaulting on payments. While an all inclusive trust deed should ideally contain a clause allowing the seller the legal right to foreclose on a property if terms are not met, it’s still a lengthy and tedious process (and one which may give sellers an entirely sympathetic perspective on what mortgage lenders have to face each day!)
The other risk is what’s known as a “due on sale clause,” which is typically included in many primary mortgages. A due on sale clause is a provision which requires any mortgage to be paid in full upon the sale of a property. This is one of the many reasons why lenders are reticent to agree to a wraparound mortgage; and one reason why most sellers should demand a sizable down payment on any AITD loan up front.
Risks of Using an AITD (Due on Sale Clause & Default)
When it comes to real estate, using an All Inclusive Trust Deed (AITD) can be risky. Here are some of the potential risks associated with using an AITD:
- Due-on-Sale Clause: One of the biggest risks of an AITD is the due-on-sale clause. This clause allows the underlying lender to call the loan due when the title is transferred from the seller to the buyer, as the sale violates the terms of the loan.
- Defaulting Buyers: Another risk with an AITD is the possibility of buyers defaulting on payments. If the buyer fails to make the required payments, it can lead to financial loss for the seller.
AITD risks vary for sure, depending on the specific terms and conditions of the AITD agreement.
Using Escrow With an All Inclusive Trust Deed
I have found that using an escrow service can be helpful when using an AITD in real estate. Here are 4 reasons why:
- Neutral Third Party
- An escrow service acts as a neutral third party in the transaction, which can help to ensure that both parties are protected and that the transaction goes smoothly. The escrow agent collects all documents and money and transfers them to the proper parties at the close of escrow.
- Another benefit of using an escrow service is confidentiality. The escrow agent is bound by law to keep all information confidential, which can help to protect the privacy of both the buyer and seller.
- Escrow agents are trained professionals who have expertise in handling real estate transactions. They can provide guidance and support throughout the process, which can help to ensure that the transaction is completed successfully.
- Risk Management
- Using an escrow service can also help to manage risk. The escrow agent can ensure that all necessary documents are signed and that all funds are properly transferred, which can help to prevent fraud and other issues.
How Exactly Does an AITD Work in Example?
To bring this into great clarity for you I’ll share an example of a possible situation where using an AITD is beneficial:
This situation involves a seller who wants to sell their property and a buyer who is interested in purchasing it. Using an All Inclusive Trust Deed (AITD) can be beneficial for both parties involved. Here’s how it could play out:
Example of Seller’s Perspective Using an AITD
- The seller owns a property with an outstanding mortgage of $400,000 at a 5% interest rate.
- The seller wants to sell the property but is concerned about finding a buyer who can secure a traditional loan due to credit or financial constraints.
- By offering an AITD, the seller can attract potential buyers who may not qualify for a conventional mortgage, might have bad credit at the moment, great income but are able to make regular payments to the seller instead.
Example of Buyer’s Perspective Using AITD
- The buyer is interested in purchasing the property but does not have the necessary credit or financial qualifications to obtain a traditional mortgage but usually has financial stability in income and home equity.
- The buyer finds the AITD option appealing as it allows them to acquire the property without going through a stringent loan approval process.
- The buyer agrees to make regular payments to the seller, who acts as the lender, under the terms of the AITD agreement.
Benefits for Both Parties:
- Flexibility: The AITD arrangement provides flexibility for the buyer and seller to negotiate the terms of the loan, such as the interest rate, repayment period, and down payment.
- Avoidance of Traditional Lenders: The buyer can avoid the strict requirements and potential rejection from traditional lenders, while the seller can bypass the need to find a buyer who qualifies for a conventional loan.
- Streamlined Process: Using an AITD can simplify the transaction process by eliminating the need for a traditional mortgage lender and associated paperwork.
- Potential for Higher Interest: The seller, acting as the lender, may be able to negotiate a higher interest rate than what they would receive from a traditional mortgage, potentially increasing their return on investment.
If you are in a situation where you are wanting to sell your house that is in an AITD arrangement or want help selling your house to buy a new house from a seller wanting to seller finance let’s talk. I’m happy to help you make the process smooth and give you nice cash offer on your current house or property. It’s free to receive a free cash offer from me by going here.