Deed Of Trust vs. Mortgage

Deed Of Trust

Mortgage and a deed of trust are not the same even though people usually use the term "mortgage" interchangeably for both.

A mortgages is a direct contract between two parties — the borrower and the lender. The borrower owns the property and pledges it to the lender in exchange for the loan to buy the property. With a deed of trust, the borrower does not hold the title to the property. Instead, a third party - called trustee - holds temporary title to the property until the borrower has paid off the loan.

The difference becomes important when the borrower defaults on the loan and the lender needs to foreclose.

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Deed Of Trust


Types The Trustee's Deed, The Reconveyance Deed and the Deed of Trust. Fixed-rate mortgages, FHA mortgage loans, adjustable rate mortgages, VA loan mortgages, interest-only mortgages, reverse mortgages.

edit Foreclosures

The difference between a mortgage and a deed of trust becomes crucial when a borrower falls behind in payments.

Mortgages require the use of a judicial foreclosure process while deeds of trust are used in states that allow non-judicial foreclosure. This makes sense because when the borrower defaults on a mortgage, the lender needs to first wrest ownership of the property from the borrower before they can foreclose on the property. This change of ownership requires a judge to issue a court order. Judicial foreclosure is slow and cumbersome for a lender. First a lawsuit must be filed. Then, there is a period of discovery and a court date must be set. And courts can grant delays to prepare cases. All told, it can take many months.

But with a deed of trust, the borrower does not own the title in the first place; so a default on the loan allows the trustee to sell the property to pay the lender the amount owed. The trustees don't have to go to court to initiate a foreclosure;

In states where deeds of trust are an option, lenders almost always choose them over mortgages, because they are "non-judicial" - and quick.

This video explains the difference between a deed of trust and a mortgage very clearly:

edit Rights of Redemption

Another difference is that liberal "rights of redemption" are more common in "deed of trust" states than in mortgage-only states. That means even if your home is foreclosed on and auctioned off, there is a time period when you can pay the debt and get the home back. This window is usually very brief, but can last for as long as a year after the property is sold at auction.

The right of redemption can be tough on foreclosure buyers. The state gives the owner the right to buy back the property for the price the auction bidder paid for it. Any additional money that buyers paid, such as for repairs or maintenance, is lost.

edit Prevalence in U.S. states

Deeds of trust are the more common of the two, used in 34 states either mostly or exclusively. States such as California, Alabama, New Hampshire, Mississippi, Michigan allow use of deeds of trust.

States such as Vermont, Florida, Nebraska and New York are examples of mortgage-only states.

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