Real Estate Articles
Mortgage vs. Deed Trust
Most of us think of our home loan as a mortgage, when that isn’t particularly true. When a borrower agrees to pay a lender a certain amount of money, under certain conditions, the borrower will sign a promissory note. A lender will then require the borrower to sign a mortgage, as a security tool to give the lender a legal form of security. A mortgage is a written document to protect the lender’s interests in your property. Therefore, a mortgage is not a loan.
A mortgage is between two parties, you the “mortgagor” and your lender. The mortgage is a document that creates a lien on your property that is entered into public records to serve as the lenders security for that debt. Possession cannot be transferred to another party until you, as the borrower, pay the debt to release the lien. Only you have all the rights of ownership to your property, even if your loan is secured with a mortgage.
Only if the borrower defaults on their mortgage will the lender have the right to protect their interests and foreclose on the property in order to recover funds. When a mortgage is used as the lenders security, foreclosure will usually go through the judicial foreclosure process through the court system that may take up to four months. Mortgages are used as security tools in more than half of the states in the U.S., while other states may use a deed of trust. Both the mortgages and the deed of trust, often serves the same purpose, but with some significant differences.
Like the mortgage, a deed of trust is entered into public records to put a lien on your property. There are three parties involved with a deed of trust: you, as the “trustor,” the lender as the “beneficiary” and a “trustee,” who is a third party that holds a temporary title until the lien is paid. The trustee holding the temporary title, should be a neutral party that does not favor the trustor or the lender, if problems should arise. These third parties acting as neutral trustee’s can be attorneys, an escrow company or title insurance companies. Under no circumstances can the third party, or trustee, take over your property.
The deed of trust will only be removed when the debt to the lender is paid. Only then will the will the trustee issue a release of the deed that should be recorded at the county recorder’s office and made available to the public that the loan has been paid in full and that the lender interests in the property have come to an end.
The difference between a deed of trust and a mortgage will only affect home owners when foreclosure becomes an issue. This is when the trustee has the authority to sell your home when your loan becomes delinquent. It is up to the lender to provide the trustee with proof of the delinquency and to request foreclosure proceedings to begin. The trustee must then proceed as allowed by law and as it is dictated in the deed of trust. The process may bypass the court system to make a much less expensive and quicker way to go for the lender during a foreclosure.
A deed of trust and a mortgage can also differ during foreclosure. Depending on where you live, state law will have to determine how a foreclosure will be handled. Normally, a deed of trust allows for a speedier foreclosure. When the borrower defaults on a loan, the lender gives the deed of trust to the trustee to sell the property. A mortgage is normally requiring a judicial foreclosure, which may take longer. Properties may not be foreclosed upon until all rules are followed and notices have been sent.
Borrowers cannot choose which way their loan is secured, whether it’s by a mortgage or a deed of trust, this is all determined by what state you live in or are buying in. It’s very important to have a complete understanding of the type of lien that will secure the debt of your home. This should all be explained to you thoroughly by your lender or trustee. Do your homework and ask questions before signing any documents. Borrowers must protect themselves as the lenders and other companies do.