Deed of Trust vs Mortgage – What’s the Difference?
The difference between a Deed of Trust vs mortgage is crucial in understanding home financing options. Both serve as legal agreements that secure a home loan. While they may seem similar, the key distinction lies in how they handle foreclosure and the parties involved in the transaction.
Homeownership is typically financed through various loan options, including adjustable-rate mortgages, fixed-rate mortgages, and government-backed loans such as FHA and VA loans. However, regardless of the type of loan, the primary way to secure financing is through a home loan.
When borrowing money to purchase a home, the borrower must provide the property itself as collateral. This security interest is established through either a deed of trust or a mortgage. If the borrower fails to make payments, the lender has a legal claim to the property.
Deed of Trust
In a Deed of Trust, the borrower (trustor) transfers the legal title of the property to a third-person (trustee) who holds it on behalf of the lender (beneficiary) until the debt is paid off.
In case of non-payment, the third-person (trustee) has the power to initiate foreclosure proceedings to sell the collateral in a public auction. The proceeds will then be used to pay off the creditor (beneficiary).
So the parties in a deed of trust are:
- Trustor (Debtor)
- Trustee (Neutral Third-Party)
- Beneficiary (Creditor)
A promissory note is a crucial document that serves as evidence of the borrower’s obligation to repay a loan or debt. The promissory note is typically secured by the trust property, which acts as collateral for the loan. In the event of non-payment, the trustee has the authority to initiate foreclosure proceedings to recover the owed money by selling the property.
Consequently, a Deed of Trust plays a critical role in the home financing process, providing both security for the lender and a pathway for the borrower to obtain necessary funds to purchase their home.
In a Deed of Trust, the title is split into two: the legal title and equitable title. The legal title is the formal ownership of the property, while the equitable title is the right to use and benefit from the property. Legal title is held by the trustee (neutral third-party), while equitable title is retained by the trustor (borrower).
Registration of Trust –
A Deed of Trust is typically recorded to provide constructive notice to the public, ensuring transparency in property ownership. This principle is a cornerstone of the Torrens System, a legal framework designed to establish clear and indisputable property titles.
Proper recording in the designated registry safeguards the rights of all parties involved in the trust agreement. For example, when land is transferred to a trustee (a neutral third party), recording this transfer publicly affirms the beneficiary’s (creditor’s) interest, making the trust legally recognized and enforceable against any third party.
This process, known as registration or recording, involves entering a notation in the certificate of title. This entry includes a reference to the specific volume and page number in the registration book where the record is stored. If a party claims an interest in registered land due to an implied or constructive trust, they are generally required to file a sworn statement in the appropriate registry to formally establish their claim.
How is the Deed of Trust Created?
You can create a trust through various means, including express and implied trusts, as well as through co-ownership.
- Express trusts are established through the clear intention of the trustor or the involved parties. While specific wording is not necessary, the intention to create a trust must be unequivocal. However, if a trust pertains to real estate, parol evidence is generally inadmissible to prove such.
- An express trust must include the names of the trustor (borrower), trustee, and beneficiary (lender), the loan amount, property description (legal description), the terms of the loan and repayment, and a power of sale clause (for foreclosure in case of default).
- Implied trusts come into being by operation of law. Several situations can give rise to implied trusts, such as when property is paid for by one party but delivered to another. Another is when land passes by succession and the legal title is put in another’s name. Acquisition of property through mistake or fraud results in an implied trust. If land registration is fraudulent, the person in whose name the land is registered holds it as a mere trustee.
- Co-ownership can be considered a form of trust, where each co-owner is a trustee for the others.
How is a Deed of Trust Recorded?
The Deed of Trust should be recorded in the county where the property is located. The borrower (trustor) needs to present the document to either the County Recorder’s Office, County Clerk, or Register of Deeds. The fees for recording differ by state and county.
- Once recorded, the Deed of Trust becomes part of public land records.
- Registration acts as formal notification of the lender’s security interest in the property.
- The borrower (trustor) retains possession but the lender (beneficiary) holds a lien.
The act of recording or registration serves as a constructive notice to all persons affecting the land subject of the trust. If not recorded, the mortgage still remains binding between the parties.
It’s worth noting that documents, like certificates of title, do not convey land or encumbrances. It is the act of registration that conveys ownership or affects the land concerning third parties.
How are Payments Handled in a Deed of Trust?
The borrower repays the lender through monthly installments, which typically include:
- Principal – the original loan amount
- Interest – the lender’s profit on the loan
- Escrow (if applicable) – property taxes and homeowner’s insurance collected by the lender
Payments continue until the loan is fully repaid or foreclosure occurs due to default. If a borrower misses payments, the lender may offer a grace period and charge late fees. Repeated missed payments can lead to a notice of default.
After a state-specific waiting period, the lender can direct the trustee to initiate foreclosure proceedings, resulting in a public auction where the property is sold to recover the debt.
What Happens When the Loan is Repaid?
When the debtor pays off the debt in full, the lender issues a Deed of Reconveyance. This Deed is then recorded with the county recorder’s office to officially clear the land title.
Mortgage
In a mortgage agreement, a borrower secures financing from a lender—typically a bank or financial institution—to purchase a home. This agreement serves as a legal contract that ties the loan to the property. It ensures the lender’s financial interest is protected.
As an ancillary contract to the loan, the mortgage grants the lender a security interest in the home. If the borrower fails to meet repayment obligations, the lender has the legal right to reclaim the property. In cases of prolonged non-payment or default, the lender can initiate foreclosure. This legal process allows them to take ownership of the home to recover the outstanding debt.
Mortgage agreements outline essential terms and conditions, including interest rates, repayment schedules, and additional fees. These terms provide borrowers with a clear framework to manage their financial obligations effectively.
Understanding State Laws in Real Estate Transactions
When considering real estate transactions, it is important to understand specific state laws. Factors such as the state’s foreclosure laws, the structure of property taxes, and the general approach to real estate financing all play a crucial role in determining the appropriate method of financing a property.
In a mortgage, there is no trustee. Instead, the mortgagor offers a lien on their property as security for the debt. This arrangement ensures that the lender (mortgagee) has a claim on the property should the borrower (mortgagor) fail to fulfill the obligations of the loan.
What Happens When a Debtor Defaults on a Deed of Trust?
When a debtor (mortgagor) defaults on their loan obligations, it is essential for the lender (mortgagee/beneficiary) to understand how to enforce their rights effectively.
Foreclosure proceedings become valid only after the borrower defaults or fails to respond to a formal demand for payment. Foreclosure serves as the primary legal remedy for lenders to recover outstanding debt by selling the collateral property.
There are two main types of foreclosure: judicial foreclosure and nonjudicial (extrajudicial) foreclosure.
- Judicial foreclosure requires a court order to sell the mortgaged property. The court grants the borrower a specific period to repay the debt following the entry of judgment. If the borrower fails to do so, the property is sold at a public auction. To legally transfer ownership from the debtor to the purchaser, the court must confirm the sale.
- Nonjudicial foreclosure is a faster and more streamlined process that allows the lender to recover the loaned amount without court intervention, provided the deed of trust or mortgage includes a power of sale clause. This method significantly reduces the time and cost associated with foreclosure proceedings.
(1) Foreclosure Process Under a Deed of Trust
A Deed of Trust typically includes a power-of-sale clause, granting the trustee the authority to initiate nonjudicial foreclosure if the borrower defaults on the loan. This clause allows the trustee to proceed with the foreclosure process without court intervention, ensuring a more efficient resolution for the lender. The proceeds from the sale of the property are then applied to satisfy the outstanding debt.
The trustee’s primary role is to manage and, if necessary, liquidate the asset on behalf of the beneficiary (lender) in the event of the borrower’s default. In some cases, the trustee may be designated as the trustor’s attorney-in-fact, enabling them to sell the property extrajudicially when the trust is created to secure an obligation.
For the sale to be legally valid, the seller must either be the rightful owner of the property or be duly authorized by the owner. The trustee must operate within the scope of their authority and in compliance with applicable laws to ensure the foreclosure is enforceable.
(2) Judicial Foreclosure Under a Mortgage
A mortgagee may satisfy the debt through an extrajudicial foreclosure just like that of a deed of trust. But a judicial foreclosure is another option.
Court-supervised or judicial foreclosure proceedings typically involve the following steps:
- Filing of a complaint that initiates a judicial foreclosure.
- If the court deems the complaint is well-founded, it will issue a court order for repayment. This period varies from 90 days to 120 days from the entry of judgment, depending on the jurisdiction.
- If the mortgagor fails to pay within the specific period, the property is sold to the highest bidder in public auction.
- When the court confirms the sale, this court confirmation divests all the rights of all the parties and vests the right in the purchaser. The confirmation retroacts to the date of the auction sale. No redemption is allowed after such confirmation.
- The judgment is executed as provided by state law and the parties cannot alter the prescribed procedure.
Does Your State Use a Deed of Trust or a Mortgage?
Here’s a detailed examination of the preferences for financing instruments across different states in the country. The table below provides an overview of the preferred instruments and foreclosure types in each state. The varying needs and preference of each state serve as the primary factor.
Where Do You Check Your State’s Property Laws and Land Records?
To better understand how financing preferences align with state-specific regulations, it is important to examine the governing laws concerning property mortgages, trusts, and real estate transactions.
To learn more about your state’s laws regarding property mortgages and trusts, you can visit your state website. For property tax laws, check under the State Department of Revenue. For real estate information, check under the Department of Real Estate.
If you need a research database, consider visiting FindLaw (www.findlaw.com) to access state-specific laws, or Justia (www.justia.com) for free legal resources by state.
For summaries of property laws, you might also want to check out the Legal Information Institute (LII) at Cornell Law School (www.law.cornell.edu).
Government Websites for Verification
To verify real estate laws and regulations, you can consult the following official government websites:
— U.S. Department of Housing and Urban Development (HUD) – www.hud.gov
*Covers federal housing policies, FHA loans, and fair housing regulations.*
— Consumer Financial Protection Bureau (CFPB) – www.consumerfinance.gov
*Provides information on mortgage laws, lending regulations, and consumer rights protections.*
— Federal Housing Finance Agency (FHFA) – www.fhfa.gov
*Regulates Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.*
— Public Access to Court Electronic Records (PACER) – www.pacer.gov
*For federal court cases involving real estate law.*
Pros and Cons of a Deed of Trust and Mortgage
Now you should know the purpose and differences of these two forms. The table below summarizes the main points at a glance.
| Pros | Cons | |
| Deed of Trust | — Faster foreclosure process (beneficial for lenders). — Trustee helps ensure neutral administration. — Lower court involvement, reducing legal costs. | — Less borrower protection in case of default. — Limited ability to challenge foreclosure in some states. — Lesser protection for the borrower (lender can foreclose quickly). |
| Mortgage | — More legal oversight. — More protection for the borrower as court involvement can delay foreclosure. | — Slower foreclosure proceedings. — Higher cost of legal fees for the lender. |
FormPros Has You Covered
Simplify your paperwork with FormPros! From creating paystubs, W-2s, and 1099-NEC forms to generating LLC Operating Agreements and even voided checks, our easy-to-use platform has you covered. Save time, reduce errors, and handle your business documents with confidence. Start now and see how FormPros makes professional form generation fast, affordable, and hassle-free!
