Mortgage vs. Deed of Trust: What is the Difference?
- Jarhett Groff
- Jan 25, 2022
- 3 min read
Why does it Matter?
*We do not offer legal advice, please consult a professional
When a borrower receives a loan to buy real estate, he/she agrees to pay the lender a certain amount of money according to the terms of the promissory note. To secure this debt the lender will require either a Mortgage or Deed of Trust instrument. This is primarily determined by the state you live in and will heavily influence the foreclosure process. It is extremely important for every real estate investor to understand the rules and instruments their state uses.
The main difference between a Mortgage and a Deed of Trust is that the Mortgage document lists only the borrower and the lender as interested parties, while the Deed of Trust instrument adds a third person titled as the Trustee.
Mortgage
When a Mortgage is used to secure real estate, the loan must be completely repaid before it can be sold. The lender will hold the lien for the property until the borrower has satisfied the loan agreement. In Mortgage States (aka Lien Theory States), the lender can begin foreclosure when the borrower defaults on his/her loan. However, the lender will need to file a lawsuit to begin the foreclosure proceedings and the entire process must go through the courts, beginning with the filing of Lis Pendens. This is known as a Judicial Foreclosure and can prove to be quite costly and time-consuming (often six months or more!).
Deed of Trust
When a Deed of Trust is used, the courts can be bypassed. Instead, a Trustee will be appointed within the document at closing. The borrower transfers title to the Trustee for the benefit of the lender and remains in trust until the note is paid off. In the case of default, the Trustee is responsible for starting the foreclosure process. Often, the first step of this process is the filing of an Appointment of Substitute Trustee because the original named trustee is not local to the property. This is known as a Non-Judicial Foreclosure and generally requires less time to complete (sometimes as little as two months).
Real estate can be a lucrative investment, but it is imperative that you, as an investor, know the laws of your land. Understanding the documents and legal procedures used in real estate transactions for your state can help better prepare you for any situation that may arise. Finding a lender you can trust and building a knowledgeable team will prove its worth time and time again.
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