Many homeowners confuse the terms “mortgage” and “deed of trust.” Though mortgages and deeds of trust both serve the same purpose, there are a few distinctions that differentiate them.
We’ll take a look at some of the differences and similarities between a deed of trust and a mortgage and highlight the most important facts you should know.
What Is A Mortgage?
Many home buyers use the terms “mortgage” and “home loan” interchangeably. You might even hear your real estate agent mixing up the two terms. The truth is that the loan you use to pay for your home isn’t the same thing as a mortgage. A loan is a document that you sign that agrees that you will repay your lender a certain amount of money by a certain date. Your mortgage is a contract you sign that places a lien on your property.
A lien is a clause that says that a company or person has the right to seize a piece of property under certain conditions. A lien states that your lender has the right to take control of your property if you violate your loan terms. The most common way to violate your loan term is to fail to make your payments on time. If you stop paying back your loan, the lien allows the lender who gave you money to recoup its losses by taking back your home. Most of the time, the lender ends up selling your home.
A mortgage is a binding contract that allows your lender to place a lien on your home. Your mortgage puts up your home as collateral for the agreement. If you violate the terms of your loan, your lender can put your home into foreclosure.
Different types of mortgages might have different loan terms. For example, let’s say you buy a home with a VA loan and along with that, you agree to live in the property as your primary residence. Your lender may find out that you’re violating the terms of your mortgage by using it as an investment property and can put your home into foreclosure. Most loans also include terms that say that you must keep your property insured and maintain flood insurance if you live in a high-risk flood zone.
What Is A Deed Of Trust?
Your lender might give you a deed of trust instead of a mortgage in some states. On the surface level, a deed of trust performs the same function as a mortgage. When you sign a deed of trust, you agree to place a lien on your property. If you don’t abide by your loan term and make your payments on schedule, the deed of trust allows your lender to seize your property. The difference between a deed of trust and a mortgage occurs during the foreclosure process. Before we talk about foreclosure proceedings with a deed of trust, we need to touch on the different types of foreclosure.
No matter what type of lien you have, your lender can put your home into foreclosure if you violate your loan terms. Foreclosure is a legal process during which a lender takes back control of your property. There are a couple of types of foreclosure: judicial foreclosure and nonjudicial foreclosure.
Judicial foreclosures are lengthier and more expensive for the lender. During a judicial foreclosure, an attorney files a lawsuit against a loan holder on behalf of a lender. The lawsuit begins with a complaint written by the attorney that lays out why the lender thinks you should go into foreclosure. Courts refer to this document as a “petition” instead of a complaint in some states, but it serves the same purpose and follows the same format. You’ll receive a copy of the complaint by mail. From there, you have a set number of days (usually 30) to file a response with an attorney of your own.
If you don’t file a response or your response doesn’t convince a judge that you should go into foreclosure, the court will rule in favor of the lender. The court will then set a sale date for the home. Most of the time, this means an auction occurs. When the date of the auction arrives, members of the public can bid on the home. The highest bidder becomes the new owner of the property.
A nonjudicial foreclosure doesn’t involve the court. Instead, an attorney working on behalf of the lender completes a few out-of-court steps to begin foreclosure. The specific steps the attorney must follow depends on the state’s laws, but may include:
- Writing and sending you a letter called a “notice of default.” Your notice of default tells you that your lender intends to begin foreclosure. It also gives you a set number of days to get caught up on your loan payments to avoid foreclosure.
- Recording the foreclosure in a local property or land record office.
- Writing and sending you a “notice of sale.” Your notice of sale tells you when the property will go up for sale on a public auction.
Nonjudicial foreclosures are almost always faster and less expensive for lenders. They allow the lender to bypass court proceedings, which saves a ton of money in attorney costs. However, not every state allows nonjudicial foreclosures. Some states allow both judicial and nonjudicial foreclosures. In these states, it's up to the lender to decide how they want to proceed with foreclosure. If this is the case in your state, your lien paperwork will tell you which type of foreclosure your lender will pursue if you violate your loan terms.
Differences Between A Deed Of Trust And A Mortgage
There are a few key differences between deeds of trust and mortgages.
- Foreclosure type: The type of foreclosure you’ll face depends on whether you have a deed of trust or a mortgage. If you have a deed of trust, you’ll usually face a nonjudicial foreclosure. If you have a mortgage, your lender will need to go through the courts.
- Foreclosure length and expense: If you have a mortgage loan, it means that your lender will need to seek a judicial foreclosure to take back your property. This means that mortgages take much more time and money to foreclose on. Most mortgage lenders will use them instead if your state allows deeds of trust and nonjudicial foreclosures. If you have a deed of trust, your lender will almost always spend less time and money reclaiming your property.
- The number of parties involved in the foreclosure: Another minor difference between a deed of trust and a mortgage is the number of parties involved with each type of contract. A mortgage involves only two parties: the borrower and the lender. A deed of trust has a borrower, lender and a third party called a “trustee.” The trustee is a neutral third party that holds the title to a property until the loan is completely paid off by the borrower. In most cases, the trustee is an escrow company. If you don’t repay your loan, the escrow company’s attorney must begin the foreclosure process.
Similarities Of A Deed Of Trust And A Mortgage
Some of the similarities between a deed of trust and a mortgage include the following:
- Neither is a loan. Neither a mortgage nor a deed of trust is the same thing as a home loan. Your loan is an agreement to pay back a certain amount of money to your lender. A deed of trust or mortgage is a contract that places a lien on your property.
- Provides a way for your lender to take back your home through foreclosure. Deeds of trust and mortgages both serve the same basic purpose. They’re both agreements that say that if you don’t follow the terms of your loan, your lender can put your home into foreclosure. The type of foreclosure may vary, but the mechanism used is still the same.
- Dictated by state laws. Both deeds of foreclosure and mortgages are subject to state laws. This means that the specific type of contract your lender has to use depends on what’s legal in your state. In some states, only a mortgage is legal. In others, lenders can only use a deed of trust. A few states (like Alabama and Michigan) allow both. If your state allows both types of contracts, it’s up to your lender to choose which type you receive.
A deed of trust is similar to a mortgage. Both are contracts that give your lender the right to place a lien on your property. A lien allows your lender to take back your property if you violate the terms of your loan.
The main difference between a mortgage and a deed of trust is the type of foreclosure that could be enacted. If you have a mortgage, your lender needs to go through the judicial foreclosure process. An attorney must petition the court for a foreclosure judgment. The court may grant or deny the judgment. Judicial foreclosures can be time-consuming and expensive for the lender.
With a deed of trust, your lender will usually use a nonjudicial foreclosure. Nonjudicial foreclosures involve a number of out-of-court steps to reclaim a property. Because nonjudicial foreclosures don’t involve a court, they’re faster and less expensive than a judicial foreclosure. However, not every state allows nonjudicial foreclosures.
Deeds of trust also include a third party called a “trustee” on their agreements. The trustee holds a property title until the homeowner pays off their mortgage. The trustee is usually an escrow company.
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