Know the difference: Deed of trust vs. mortgage
Quick insights
- With a deed of trust, title is held by a third-party trustee until the loan is paid in full.
- Foreclosure of a deed of trust is often completed non-judicially, which means the court is not involved.
- Having a deed of trust vs. a mortgage typically isn’t a regular factor in your loan repayment.
If you’re planning to buy a home soon, the state you’re buying in may require you to use a deed of trust to conduct your property transaction. A deed of trust is a legal agreement that formalizes the terms between a borrower and a lender on a real estate property sale. It’s like a mortgage, with a few key differences, including the placement of legal rights to the home. During repayment for a deed of trust, the legal title is held by a third party, rather than the lender itself.
In this article, we’ll further clarify the differences between a deed of trust and a mortgage. We’ll also dig into the implications of each as they relate to the foreclosure process.
What is a mortgage?
A mortgage is used to secure a loan that provides funds to a borrower in exchange for repayment. The home’s title (representing legal ownership of the home) is given to the borrower and remains with them throughout repayment. As part of “securing” the loan on behalf of the lender, the mortgage agreement creates a lien on the property. The lien grants the lender a legal claim to the property if the borrower fails to repay the loan.
Foreclosure on a home with a mortgage
If the borrower fails to repay the loan (or defaults), the lender can choose to pursue a foreclosure. Foreclosure of a mortgage most often occurs judicially—this means it is filed in a court of law. Through the foreclosure, the property is sold to recover the amounts due on the loan and title is transferred to the successful bidder at foreclosure sale. Judicial foreclosures typically require more time and resources compared to non-judicial foreclosures.
What is a deed of trust?
Like a mortgage, a deed of trust is a legal agreement used in real estate transactions to secure a loan with the property as collateral. A primary difference from a mortgage, however, is that the document involves three parties, instead of two:
- A borrower, or the “trustor,” who is purchasing a home.
- A lender, the “beneficiary” of the trust, who has provided funds for the purchase.
- And a trustee, who holds the title to the property during the loan’s repayment.
Unlike a mortgage where title is held by the borrower during the period of repayment, with a deed of trust title to the home is placed with a third-party trustee during the repayment of the loan.
Foreclosure on a home with a deed of trust
Whether a mortgage is foreclosed judicially or non-judicially, depends on state law. Foreclosure on a deed of trust most often occurs non-judicially. Deeds of trust include what’s called a “power of sale” clause, which allows the sale of the property without going to court. Following a default, the trustee can initiate the foreclosure process which is generally faster and less expensive than a judicial foreclosure. However, a homeowner can take a legal action to bring the foreclosure before a court.
In conclusion
The use of a deed of trust versus a mortgage often depends on the state or region. Some states predominantly use deeds of trust, while others use mortgages. This is largely due to the differences in foreclosure laws and processes in different states. Unlike with a mortgage, the home’s title is held with a third-party trustee during the repayment phase. Before getting too far along with the homebuying process, it can be helpful to check the local laws for your state and confirm if deeds of trust are used in your area.
Whether you have a mortgage or deed of trust, it’s unlikely to be a regular factor in your month-to-month repayment. For questions related to home loans in your area, consider reaching out to a Chase Home Lending Advisor who can help clarify and discuss your options.
