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Deed of Trust vs. Mortgage: Key Differences

deed of trust vs. mortgage

Real estate transactions seem to have their own language. When it comes to a deed of trust versus a mortgage, the differences between these two documents involve the number of parties involved and the process a lender must follow for a foreclosure.

Confused? That’s OK. Let’s explore the differences between the two types of security interests and how to determine which one you have.

What is a mortgage?

A mortgage is an agreement between you and a lender. Sometimes referred to as a mortgage note, the mortgage establishes that if you don’t make the payments on your home loan that you agreed to, the lender can take back your home. If you review your mortgage note, you may also see the terms mortgagor versus mortgagee. In legal terms, the borrower is the mortgagor and the lender is the mortgagee.

What is a deed of trust?

A deed of trust is similar to a mortgage in that it establishes security interest in your home. A deed of trust (sometimes called a trust deed) has three parties involved: the borrower, the lender and a trustee. The borrower agrees to pay the lender who transfers security interest to a third-party trustee. If the borrower stops paying on the mortgage, the trustee takes control of the property and sells it on behalf of the lender.

You might see the term mortgage deed, but that typically refers to a mortgage note — not a deed of trust. Although a trust deed’s meaning is essentially the same as that of a mortgage, in that it establishes that borrowers lose the property if they stop paying on their loan, the way it works is a bit different when it comes to the foreclosure process. You might also see the term “first trust deed” used if you take out a second loan secured by your home, like a home equity loan or a loan to help with your down payment. The first trust deed secures your primary home loan, and a second trust deed secures additional loans.

Key differences between a mortgage and a deed of trust

Although the two security instruments are similar, they lead to two very different foreclosure processes and involve different numbers of people. Let’s take a closer look at the difference between a deed of trust versus a mortgage.

Number of parties

A mortgage involves two parties: a mortgagor versus a mortgagee. The mortgagor is the borrower, and the mortgagee is the lender. A deed of trust has three parties: a borrower, a lender and a trustee. In most states, a title company acts as the trustee.

Foreclosure process

Each type of security instrument leads to a different type of foreclosure process. Deed of trust states typically have a non-judicial foreclosure process. “The trustee has the power under the terms of the deed of trust to actually sell the property,” said David Reiss, professor of law at Brooklyn Law School and real estate expert. “That can happen in some jurisdictions in a matter of weeks or a matter of a few months.”

A deed of trust foreclosure doesn’t involve going to court. In mortgage states, though, the lender must get a court order to foreclose on a home. This is called a judicial foreclosure. “In many jurisdictions, particularly in New York and New Jersey, [a judicial foreclosure] could take years to actually do,” Reiss said. “From a lender perspective, that’s not so great.”

Your state’s laws will determine which security instrument you use and which type of foreclosure process lenders are required to follow. Some states allow both types of foreclosures, but non-judicial foreclosures are more common than judicial foreclosures. The states that primarily use a non-judicial foreclosure process are Alabama, Alaska, Arizona, Arkansas, California, Colorado, Georgia, Idaho, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, Oregon, Rhode Island, Tennessee, Texas, Utah, Virginia, Washington, West Virginia, Wyoming and the District of Columbia.

Deed of trust Mortgage
Number of parties Borrower, lender and trustee Borrower (mortgagor) and lender (mortgagee)
Foreclosure type Non-judicial Judicial
Who benefits The lender The borrower

How to determine if you have a mortgage or a deed of trust

If you’re contemplating borrowing against your home, you might want to determine whether you have a deed of trust versus a mortgage. Here’s where to look:

  1. Your loan documents. This is the best place to start and should specify “mortgage” or “deed of trust” in the title.
  2. Your loan correspondence. If you can’t find your loan documents, check correspondence with your lender.
  3. Your lender. Contact your lender directly for clarification.
  4. Your county recorder. Your county recorder should have a copy of the original security instrument, which you might be able to search for online.

Deed of trust vs. mortgage FAQs

Who can be listed on a deed of trust or mortgage?
A deed of trust or mortgage lists all the parties in the agreement. Both types of agreements list all of the borrowers and the lender. A deed of trust also includes the trustee.

How are these security instruments recorded in public records?
Both mortgages and deeds of trust are recorded with the county in which the property is located. You typically pay a fee for recording the security instrument. When the home loan is paid in full, the lender releases the deed of trust or mortgage.

Does the deed of trust or mortgage have any impact on how I hold title to my home?
Legally speaking, your title is separate from your deed of trust or mortgage, Reiss said. “There’s legal title and there’s equitable title,” Reiss said. The legal title is who is technically considered the owner of the property. Equitable title is who the courts would legally consider the owner.

“With a mortgage, the homebuyer has both legal and equitable title for the property, but with a deed of trust, legal title gets transferred by the deed of trust to the trustee and they are the legal owner of the property in property records,” he said.

With an equitable title, which is the title you hold if you have a deed of trust, you have the legal right to sell and insure your home. You’re the owner from a legal perspective, but the trustee holds the legal title since it could sell your home in the event of a foreclosure.

If there’s a recording mistake on the deed of trust or mortgage, will that impact the title of the home?
The title is separate from your deed of trust or mortgage. Courts will generally disregard recording mistakes and it won’t impact your title. That being said, it’s best to correct a recording mistake as soon as possible. The process varies by state, so talk to your county clerk for guidance.

What is a warranty deed vs. a deed of trust?
A warranty deed is a legal instrument used to transfer ownership of a property. A warranty deed states that there are no pending lawsuits or damages against the property. A deed of trust isn’t used to transfer ownership. It’s a security instrument that establishes that the trustee can take control of the property if borrowers don’t repay their home loan.

What is a mortgage promissory note?
A mortgage promissory note establishes the terms of the home loan. It includes the interest rate, how much was borrowed, when payments are due and when payments are considered late.

 

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