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.