Though it is common to hear mortgage and deed of trust used interchangeably, they are two different types of contracts. A mortgage is a direct contract between two parties — the borrower and the lender. The borrower owns title to the property and pledges it to the lender as security for the loan. With a deed of trust, the borrower does not own the title to the property. Instead, a third party, known as a trustee, has a temporary hold on the title and will only hand over the title to the borrower, known as the trustor, when the loan is repaid in full. This difference between mortgages and deeds of trust becomes very important if a borrower defaults on the loan and the lender needs to foreclose. In the U.S., deeds of trust are much more common than mortgages.
|Deed Of Trust||Mortgage|
|Ownership||A third-party, known as trustee, holds title to the property until the borrower has paid off the loan.||The borrower owns title to the property, but pledges it to the lender as security for the loan.|
|Foreclosure Process||Allows for non-judicial foreclosure.||The lender must go to court before foreclosing on the property.|
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 foreclosing on the property. This change of ownership requires a judge to issue a court order, which can be a slow and cumbersome process for a lender.
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 repay the lender. No judicial process is required for a trustee to begin a foreclosure.For this reason, when lenders have the option to choose between a mortgage contract and a deed of trust, they will often choose a deed of trust.
The following video explains the difference between a deed of trust and a mortgage very clearly:
Rights of Redemption
"Right of redemption" refers to the legal right borrowers have to try to reclaim property they are losing — or have already lost— to foreclosure. To reclaim their property, they must repay debt and often the principal balance of the original loan.
Though it may seem as though borrowers have few rights and protections in the states that favor deeds of trust, these states actually tend to have more liberal rights of redemption than mortgage-only states do.Some states will even allow borrowers to try to make good on their defaulted home loan for up to a year after the property is foreclosed upon and sold at auction, but this varies significantly by state.Such leniency in deed of trust states can be extremely helpful to those who have been through a foreclosure but difficult for anyone who has bought a foreclosed home at auction.
Prevalence in U.S. States
Over 30 states and the District of Columbia allow deeds of trust in real estate. As deeds of trust are so much more appealing to lenders, this means trust deeds are much more common than mortgages in the majority of U.S. states. There are, however, a few mortgage-only states, like Florida, New York, and Vermont.