A mortgage or deed of trust is an agreement in which a borrower puts up title to real estate as security (collateral) for a loan.
People often refer to a home loan as a "mortgage." But a mortgage isn't a loan agreement. The promissory note promises to repay the amount you borrowed to buy a home. A "mortgage" is a contract between you and the lender that creates a lien on the property.
Some states use mortgages to create the lien, while others typically use deeds of trust or another similar-sounding instrument. The mortgage or deed of trust gives the lender the right to foreclose if you fail to make the payments or violate the loan contract in some other way.
While mortgages and deeds of trust are similar because they're both agreements in which a borrower puts up the title to real estate as collateral for a loan, these legal instruments have differences. They differ in the parties involved and how the foreclosure process usually works.
What Are the Similarities Between a Mortgage and a Deed of Trust?
When you take out a loan to buy a home, the lender usually has you sign a promissory note and a mortgage or a deed of trust.
You Sign a Promissory Note With Both a Mortgage and a Deed of Trust
By signing a promissory note for a home loan, you promise to make regular payments, usually monthly, to repay the amount you've borrowed. It's basically an "IOU."
The Mortgage or Deed of Trust Creates the Security Interest in the Property
With a mortgage or deed of trust, you give the lender a security interest in the home—that is, the home becomes collateral for the loan. The lender records the mortgage or deed of trust in the land records to create a lien on the property.
Some states use mortgages to create a lien on the property, while others typically use deeds of trust. Other states use another similar-sounding instrument to create security interests, like a "security deed."
What Are the Differences Between a Mortgage and a Deed of Trust?
The two main differences between a mortgage and a deed of trust are:
- a mortgage involves two parties, while a deed of trust has three, and
- mortgages are usually foreclosed judicially, while deeds of trust typically go through a nonjudicial foreclosure process (but not always).
How Does a Mortgage Work?
A "mortgage" is a legal contract in which you pledge real estate as security (collateral) for a loan.
Who Are the Parties Involved in a Mortgage?
With a mortgage, the two parties to the contract are:
- the mortgagor (the borrower, who is responsible for making the monthly payments to repay the loan), and
- the mortgagee (the lender).
How Mortgage Transfers Work
Mortgage transfers between banks and other entities are common. When a mortgage loan is sold from one party to another, this transfer is documented and typically recorded in the county records.
The document that transfers a mortgage from one entity to another is called an "assignment of mortgage." Usually, each assignment is recorded in the county land records.
What Happens If I Default on My Mortgage?
The mortgage gives the loan owner the right to sell the secured property through a foreclosure if the mortgagor doesn't make the payments or breaches the loan contract in another way (called "defaulting" on the loan). Judicial foreclosures, which go through the state court system, are typical in states that use mortgages as security instruments.
However, in a few states that use mortgages, like Alabama and Michigan, foreclosures are ordinarily nonjudicial. In these states, the mortgage contracts' terms and state laws allow lenders to conduct out-of-court foreclosures of mortgages.
How Does a Deed of Trust Work?
A "deed of trust" also pledges real property to secure a loan. This document is usually used instead of a mortgage in some states.
Who Are the Parties Involved in a Deed of Trust?
Again, while a mortgage involves two parties, a deed of trust involves three:
- the trustor (the borrower)
- the lender (sometimes called a "beneficiary"), and
- the trustee.
The trustee is an independent third party, like a title company, trustee company, or bank. The trustee holds "bare" or "legal" title to the property.
The trustee holds the property's title in trust, with the power of sale. The "power of sale" clause in the security document pre-authorizes the property's sale through a nonjudicial foreclosure process after a borrower defaults, like by failing to make the monthly payments.
The borrower gets equitable title and the use of and responsibility for the property. When the borrower pays the debt in full, they get the property's legal title. But if the borrower defaults on payments, the trustee will handle the foreclosure process and sell the property at a public auction.
How Deed of Trust Transfers Work
Like mortgages, when a deed of trust is transferred from one party to another, an assignment is usually recorded in the county records.
Transfers of mortgages and deeds of trust are both called "assignments." An "assignment" transfers the seller's interest under the mortgage or deed of trust to the new owner.
What Happens If I Default on My Deed of Trust?
Nonjudicial foreclosures are typical in states that use deeds of trust. The lender can foreclose without going to court if the deed of trust contains a power of sale clause. Although, the lender might decide to foreclose judicially, even if a nonjudicial foreclosure process is available.
State law lays out the procedural requirements for nonjudicial foreclosures. Nonjudicial foreclosures tend to be much quicker than judicial foreclosures.
Which Is Better: Mortgage or Deed of Trust?
From a borrower's perspective, it might be better to have a mortgage if you default on your home loan. Again, judicial foreclosures typically take much longer than nonjudicial ones. Assuming you live in a judicial foreclosure state, you'll get more time to live in the home payment-free while the foreclosure works its way through the court.
Also, if your state requires a judicial foreclosure process, jumping into the existing lawsuit is easier and less expensive if you want to fight the foreclosure. If your foreclosure proceeds without court supervision (a nonjudicial foreclosure), you'll have to bring your own lawsuit—a more involved and costly process.
But one benefit to a nonjudicial foreclosure is that, in some states, the lender is prohibited from seeking a deficiency judgment if the lender forecloses a deed of trust nonjudicially. However, under certain circ*mstances, deficiency judgments aren't allowed after judicial foreclosures in some states.
From a lender's perspective, a deed of trust is usually better because it can foreclose more quickly for less money using a nonjudicial process if the borrower stops making payments.
Can I Choose a Mortgage or Deed of Trust?
You don't get to choose whether to sign a mortgage or deed of trust. The real estate industry in your state and the laws that industry's lobbyists have pushed through that state's legislature pretty much determine whether mortgages or deeds of trust are used where you live.
A few states let lenders use both trust deeds and mortgages. Still, even in these states, your lender will choose which document you'll have to sign. The decision isn't up to you.
How Do I Find Out Whether I Have a Mortgage or Deed of Trust?
To find out whether a mortgage or deed of trust was used to secure your home loan, you can:
- look at the documents you received when you closed escrow on your house
- contact your loan servicer, or
- go to your local land records office and pull up the recorded document. Sometimes, these records are also available online.
To learn which foreclosure process is usually used in your state, check our Key Aspects of State Foreclosure Law: 50-State Chart or talk to a local attorney.
