Deed Of Trust Vs. Mortgage

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What is a deed of trust?

A deed is a legal document that shows who has title to — or ownership of — a piece of property. And a deed of trust, or a “trust deed,” is a deed that gets put into a trust.

Like a mortgage, a deed of trust agreement obligates the borrower to repay a home loan, with the home serving as collateral if they default. Deeds of trust are used instead of mortgages in some states.

How does a deed of trust work?

There are three parties in a deed of trust: the lender, the homebuyer or borrower, and the trustee. The trustee is a third party who plays the role of intermediary for the real estate transaction, usually a title company or escrow company. It can also be another party, such as an attorney or bank.

Here’s how the process works:

1. The lender gives the borrower the funds to make the home purchase.
2. In exchange, the borrower provides the lender with a promissory note. This outlines the terms of the loan and the borrower’s promise to pay.
3. The borrower transfers the real property interest — or the right to the particular piece of real estate — to the trustee.
4. The trustee holds the deed until the borrower repays the lender, at which point the borrower receives the deed.

Deed of trust vs. mortgage

Both a deed of trust and a mortgage are agreements between a lender and a borrower to fund and repay a home loan. Both also state that the home serves as collateral for the loan, meaning if the borrower stops repayment, the lender has recourse.

A deed of trust, however, adds a third party to the agreement: a trustee, an unbiased third party that holds the property’s title while the loan is being repaid. A mortgage, on the other hand, involves only the lender and the borrower.

Deeds of trust and default

The differences between a mortgage and a deed of trust become important in cases of default.

If a borrower fails to repay a mortgage, it’s “usually foreclosed judicially, through the court system,” according to Amy Loftsgordon, legal editor at Nolo. Judicial foreclosure is a lengthy process that involves expensive legal fees.

If the borrower defaults on a loan secured by a deed of trust, the trustee has the right to take control of the property. “Deeds of trust are usually foreclosed through an out-of-court, nonjudicial process,” Loftsgordon says. Nonjudicial foreclosure typically happens more quickly than judicial foreclosure.

State laws and deeds of trusts

“A deed of trust is not recognized by all states,” says Kevin Frankel, a partner at Fiffik Law Group. According to Rocket Lawyer, deeds of trust are used exclusively in 25 states and the District of Columbia, while nine states permit both the use of deeds of trust and mortgages.

In the states that allow both mortgages and deeds of trust, such as Arizona and Michigan, the lender can choose which to use. Lenders typically opt for the deed of trust, as it speeds foreclosure proceedings if the borrower defaults.

FAQ

• How does a deed of trust impact foreclosure?
  

  Under a deed of trust, if the borrower is in default, the property can be sold by the trustee without going through a costly, lengthy legal procedure. The process is known as a nonjudicial foreclosure.

  Nearly all deeds of trust include a power-of-sale clause, which allows the trustee to sell the home without needing to foreclose on it first. Alternatively, borrowers may pursue a deed in lieu of foreclosure.

• Can a deed of trust be transferred?
  

  Deed of trust transfers operate similarly to mortgage transfers, though neither one is especially common. Whether buying a house with a deed of trust or a mortgage, the transferee will most likely need to enter into a new arrangement as part of the sale. However, in certain circumstances, like a property owner’s death, divorce or living will proceeding, both mortgage and deeds of trust can be transferred. The appropriate authorities — usually a municipal government — will have to record the transfer, just like they would for a purchase agreement. And, Frankel says, “Based on the terms of the deed of trust, it may be assigned if all three parties agree in writing.”

• What is the difference between a deed of trust and promissory note?
  

  To compare a deed of trust to a promissory note, think of the deed of trust as the whole agreement while the promissory note is just one part. The promissory note focuses on the borrower’s commitment to repay the lender. The deed of trust is an overarching document that specifies what happens if the borrower defaults on the loan.