Mortgage vs. deed of trust

For most Americans, buying a home is simply too expensive to do with cash. If you’re considering becoming a homeowner, you’re likely thinking about what it takes to get a home loan from a mortgage lender. At closing, you might sign either a mortgage or a deed of trust: Both use the home you buy as collateral for your loan, and both require a promissory note (a document in which you agree to pay back the loan).

You’re probably somewhat familiar with how a mortgage works: A mortgage is an agreement between a homebuyer and lender that establishes a property as collateral for a loan. It describes how the lender can take away the property in the event the borrower fails to repay.

Deeds of trust are similar, but they involve a third party (called a trustee) who’s responsible for the title of the home until the borrower finishes paying off the loan. Knowing the difference is vital to understanding your loan agreement and what might happen if you’re unable to repay.

What is a mortgage?

Mortgages are often conflated with home loans. However, the mortgage is actually an agreement between the mortgagor (the borrower) and the mortgagee (the lender) — not the loan itself. A mortgage agreement states that you’ll pay back the home loan according to the loan terms, and then you’ll own the home free and clear.

A mortgage contains a mortgage lien. This is a legal claim the mortgagee has on the borrower’s property until they pay off their loan. This allows the lender to take the home from the borrower if they default and sell the home to cover the cost of the mortgage — a process called foreclosure.

What is a deed of trust?

A deed of trust is not to be confused with the term “mortgage deed,” which is just another way of saying “mortgage loan.”

A deed of trust requires three parties:

• The borrower
• The lender
• The trustee (a neutral third party — often a title company)

In a deed of trust, as with a mortgage, the borrower makes monthly loan payments to the lender. However, the trustee holds the title to the property to the trustee while the borrower makes payments. Deeds of trust aren’t as common as they once were, though some states still use them. Depending on your location, your state may require a mortgage or a deed or trust —some allow either.

Deed of trust vs. mortgage

Mortgages and deeds of trust share many similarities. However, there are several differences worth noting.

With a deed of trust, the trustee doesn’t need a court order to foreclose. A mortgage typically requires a court order to start this process.

Most notably, deeds of trust involve three parties — the borrower, the lender and the trustee (who helps facilitate the agreement). When you purchase a home with a deed of trust, you pay the lender. However, the lender transfers the collateral (the title) to the trustee. Since the trustee holds the property title, it’s responsible for starting the foreclosure proceedings if the borrower defaults.

In states that use deeds of trust, the trustee does not need a court order to start this process. This is called a nonjudicial foreclosure. Without court involvement, the process is quicker. The trustee also sells the home on behalf of the borrower to recoup any loss.

Mortgages, on the other hand, only involve two parties — the borrower and the lender. The borrower pays the lender and retains the collateral (the property title).

If you default on your mortgage, the lender starts the foreclosure process. Lenders generally have to get a court order before foreclosing on your home. This is why mortgage foreclosures are called judicial foreclosures. Judicial foreclosures generally take much longer than nonjudicial foreclosures.

Bottom line

Mortgages and deeds of trust are very similar: They both secure a property as collateral for a home loan. However, deeds of trust add a third party — the trustee — that retains the collateral (the property title) and can foreclose without a court order if the borrower defaults.

Some states allow both options for borrowers. If you realize you’re not sure which type of agreement you have with your lender, you can figure it out by looking at your loan documents, contacting your lender or checking with your county recorder.