Mortgage vs. Deed of Trust

What is a mortgage?

Mortgages are often conflated with home loans. However, the mortgage is actually an agreement between the mortgagor and mortgagee — other names for the borrower and 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 over the borrower’s property until the borrower pays off their loan. This allows the lender to take the home from the borrower if they default and sell it to cover the mortgage costs — a process called foreclosure.

Put simply, a mortgage is an agreement between a homebuyer and a lender that establishes a property as collateral for a loan. It describes how the lender can take back the property if the borrower fails to repay.

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What is a deed of trust?

Deeds of trust are similar to mortgages, 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. 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)

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 for 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 of trust, and some allow either.

Who can serve as trustee?

The trustee in a deed of trust must be a neutral third party who can act on behalf of both the borrower and the lender. In most states, this is typically a:

• Title company
• Escrow company
• Real estate attorney
• Bank

Some states also allow individuals to serve as trustees, but lenders usually prefer institutional trustees because they have experience handling title issues and foreclosure procedures.

State law plays a major role in determining who’s eligible to serve. Some states require trustees to be licensed, while others give lenders discretion to choose. Regardless of who serves, the trustee must remain impartial, meaning they can’t take sides in disputes and must follow the rules laid out in the deed of trust.

Deed of trust vs. promissory note: what's the difference?

A promissory note is the borrower’s written promise to repay the loan. It outlines the loan amount, interest rate, repayment schedule and what happens if the borrower defaults. It’s essentially the IOU that creates the debt.

A deed of trust, on the other hand, is the document that secures that debt with the property. It links the loan to the home by giving the trustee temporary legal title to the home until the borrower pays off the promissory note. If the borrower fails to meet the obligations in the promissory note, the deed of trust gives the trustee the authority to start foreclosure on the lender’s behalf.

What is a deed of reconveyance?

A deed of reconveyance is a document that the trustee issues when the borrower has fully paid off the loan secured by a deed of trust. It officially transfers the legal title from the trustee back to the borrower, clearing the lender’s claim on the property.

This document is typically recorded with the county to update the public records. It serves as proof that the borrower satisfied the debt and now owns the property free of that deed of trust. Without it, the old lien could remain on record and complicate future sales or refinancing.

Can you transfer a deed of trust?

A deed of trust doesn’t transfer freely on its own because it’s tied to a specific loan and borrower. When you sell a home, the deed of trust is usually paid off and released, and the new buyer takes out their own loan secured by a new deed of trust.

There are a few exceptions:

• Inheritance can pass the property and its existing deed of trust to heirs, but the lender still has rights under the loan terms.
• Assumption allows a qualified buyer to take over the loan and its deed of trust, but this requires lender approval.

Most deeds of trust include a due-on-sale clause, which lets the lender demand full repayment if the property transfers without permission. This clause is the main reason deeds of trust typically aren’t transferable in standard sales.

Comparing mortgages and deeds of trust

Mortgages and deeds of trust are very similar: They both secure a property as collateral for a home loan. However, there are several differences worth noting.

Key differences

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.

Deeds of trust involve three parties: the borrower, the lender and the trustee (who facilitates 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.

Pros and cons of mortgages

For borrowers, mortgages offer strong legal protections but can take longer to resolve if you fall behind.

Pros and cons of deeds of trust

Deeds of trust can make resolving loan issues faster, but borrowers have fewer legal protections.

» READ MORE: How to stop foreclosure

Which states use deeds of trust vs. mortgages?

State laws vary because real estate and foreclosure rules developed differently across the country. Many Western and Southern states use deeds of trust, which allow a trustee to handle the title and usually make foreclosure faster and simpler. Northeastern and Midwestern states generally use mortgages, which involve the courts and give borrowers more legal oversight.

State-by-state summary

How to check your state’s requirements

Here are a few ways to find out whether your state uses a mortgage or a deed of trust for a home loan:

1. Look up your state’s real estate or banking website for “mortgage” or “deed of trust” laws.
2. Check your county recorder or clerk’s office for foreclosure rules.
3. Ask your lender or a local real estate attorney which instrument your state uses.
4. Check your loan or title documents, which will either say “mortgage” or “deed of trust.”

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