Deed of Trust vs. Mortgage

Buying a home and not sure where to start? You’ll need to find some funding to get started. Your new home will require a purchase agreement, but before you head to the bank for a loan, know what kind of agreement is necessary based on your needs and your location. Chances are, you’ll either have a deed of trust or a mortgage.

What is a deed of trust?

A deed of trust is a legal document that spells out the terms and conditions for purchasing a home. This document is signed at a real estate closing establishing who owns the home and who has provided funding. The agreement involves a buyer and lender, and a third party holds the title of the home until it is paid off. 

As security, the borrower gives a real property interest, or some sort of claim to the property, to a trustee. That trustee is most likely a title company, but sometimes it is a bank. Depending on what state you live in, it would be used in place of a mortgage.

Not every state uses deeds of trust.

So, how does a deed of trust work? Typically, three parties are involved—the borrower or trustor; the lender, known as the beneficiary; and the trustee, which is the neutral third party that will hold the deed of trust. In certain circumstances, a real estate attorney familiar with state laws and ordinances would be helpful for negotiating the terms of a sales contract. Also, since foreclosure procedures are different compared to a mortgage, a lawyer can help negotiate terms if the borrower defaults. Having an attorney provides extra insurance, but in some cases, it may not be necessary.

What is a mortgage?

A mortgage is an agreement that provides a borrower with money to purchase a home. A mortgage lender gives the buyer the money needed to buy the property. Then, the purchaser pays the agreed-upon amount in installments. The home itself becomes collateral in case of a default. 

Obtaining a mortgage involves a buyer and lender. It may seem to involve a lot of people, but it is really a two-party agreement. The term “mortgage” is often used interchangeably with “loan” when it should refer to the signed agreement. At closing, the completed mortgage note is sent to a title agent or the person who signs off on the sale, and that title agent acts as a witness and records the mortgage agreement. 

In some places, a real estate attorney may be necessary. A real estate attorney may be able to assist with any aspect of closing the mortgage loan. For instance, he or she reviews your sales contract and escrow terms and agreements. The attorney would know local regulations, such as whether or not a murder on the property needs to be disclosed, water quality, or if any radon testing was done. They could also determine if as-is sales are legal. Real estate attorneys are especially helpful with investment properties, which may require a different type of loan or different ordinances. 

Deed of trust vs. mortgage: Full comparison

Similarities

• Neither a deed of trust nor a mortgage is actual money.
• They are both legal documents used to secure a home loan on a property. You can also still get your house taken from you and sold if you default––both documents allow the bank to start a foreclosure process. 
• Both a mortgage and deed of trust are public records that must be filed with your county courthouse.  
• After satisfying the terms of the contract in both cases, the secured instrument (deed) is released to you. 
• In both cases, you have complete control of the property and have full responsibility over it, even without holding the deed of trust.
• Both documents are completed before being presented at the closing table.

Differences 

• In a mortgage, there may be fewer parties involved.
• Both documents have a lender and borrower, but a deed of trust also involves a trustee, which is not required with a mortgage. That trustee may be a title company.
• Both types have different procedures for foreclosure. With a deed, nonjudicial foreclosure can be pursued, while a mortgage uses judicial foreclosure. 
• With a mortgage, the borrower holds the property’s title. In a deed of trust, however, the trustee holds the property’s legal title.

Foreclosure process

The foreclosure process is the most significant difference between the two. A deed of trust calls for a nonjudicial foreclosure, meaning that it is not handled in front of a judge. Instead, the lender lets the trustee know that the borrower failed to make the agreed payments. From there, the trustee prepares to sell the home.

A foreclosure is a judicial process, which means court filings and a judge are involved. The process typically starts after 120 days. Deeds of trust don’t need a court order, and they will follow the foreclosure proceedings outlined in the legal agreement, unlike mortgages, which require an expensive court-supervised process that comes after a lawsuit.

The former starts immediately and can happen within a couple of months, and the latter could take a few years. 

Main components of mortgages and deeds of trust

There are many common elements between the two documents. Here is a list of what you’ll find, no matter which you choose:

• Name of the lender and the borrower (and the trustee if a deed of trust)
• Date on which the contract was signed
• Legal property description and the address. For example, is the property a single-family home duplex or multifamily unit?
• The mortgage loan amount 
• The frequency of payments and the payment method. Typically, that is a check, money order, cash, or credit or debit card every month. 
• When the loan should be paid off, or the maturity date. The two documents also give conditions in case you decide to pay your home loan early (will there be a penalty?).
• Who has legal title
• What happens if you default on a loan: Depending on the terms, you may have time to catch up, or you could immediately pursue the foreclosure route.
• Riders or specifics involved in the sale. This could involve any restrictions on physical changes to the home or even orders to remove an above-ground swimming pool from the property. 

Changes can often be made after signing, and a new mortgage or deed of trust will be drawn up.

FAQs

Should I use a deed of trust? 

It depends, and in some instances, you don’t get to choose. A lender benefits from a deed of trust since the foreclosure process is quicker and less costly. Some states require deeds of trust instead of mortgages. In those states that honor both, a deed of trust can be used for investment properties since the buyer becomes the lender.

Can I sell my home with a deed of trust? 

You can sell your home, but if you plan to sell it for less than the agreed-upon amount, the lender has to approve the sale. Any profits over the agreed-upon amount go to the borrower. 

What happens if you default on a mortgage vs. a deed of trust?

Both will require you to surrender your property or collateral in case of a default. With the mortgage, you have to go through the court system, and the court proceedings take time and money. With a deed of trust, the parties involved must follow the terms listed in the agreement for foreclosure. The property can go right up for sale or auction.

Can I choose between a deed of trust or a mortgage?

It depends on your state laws. Most states have either deeds of trust or mortgages, but a few states do let you choose. Those states are Alabama, Arkansas, Illinois, Kentucky, Maryland, Michigan, and Montana.

Who is listed on a deed of trust or mortgage?

The buyer and the trustee are listed on the deed of trust. With a mortgage, a buyer and lender are listed. Even if an attorney is involved here, she doesn’t need to be listed.