Is a Mortgage a Deed of Trust?

For all those in the process of buying their first real estate, there are many vague terms related to loans to be explained. Since the loan application process is quite a complex procedure, and people usually end up confused about all the terms, it’s quite understandable to need some things explained. For example, is a mortgage a deed of trust?

A mortgage is not a deed of trust – those are two different terms. A mortgage usually involves only two parties: the lender and the borrower. A deed of trust implies there are three parties in the loan process: the borrower, the lender, and the trustee. The trustee is a neutral party that holds the property until the loan has been paid off by the borrower. 

Mortgage with percentage in front of house

What Is the Difference Between a Mortgage and Deeds of Trust?

A mortgage and a deed of trust are instruments used for lending in real estate, where the lender will take a security interest in the piece of property as collateral. Depending on the law of the specific state, there are different mechanisms to ensure this happens. 

Some states are referred to as judicial states that use mortgages, while others are non-judicial and use a deed of trust to accomplish the same goal – securing their interest. Although the deed of trust serves the same goal and is often mixed up with the mortgage, it actually functions quite differently. 

What States Prefer a Deed of Trust Rather Than a Mortgage When It Comes to Purchasing a Real Estate?

Although mortgages are generally the preferred way of securing interest when it comes to real estate purchases, there are some states that still prefer using deeds of trust. Here is the list of fourteen states where deeds of trust are commonly used:

  • Alaska, 
  • Arizona, 
  • California, 
  • Colorado, 
  • Idaho, 
  • Illinois, 
  • Mississippi, 
  • Missouri, 
  • Montana, 
  • North Carolina, 
  • Tennessee, 
  • Texas,
  • Virginia, 
  • West Virginia. 

On the other hand, states like Kentucky, Maryland, or South Dakota allow both mortgages and deeds of trusts, so the borrowers can go for the more suitable solution. 

Mortgage vs. Deed of Trust – Here Is What to Know Before Buying Real Estate

The big difference between a mortgage and a deed of trust lies in the fact there are different parties involved in the whole process of loan approval. A mortgage is a direct agreement between the lender (financial institution) and the borrower. 

The owner of the property is the borrower and pledges that realty to the lender as collateral. In case that the loan cannot be paid off by the borrower, it means that the bank can ask for its rights before a court. This is known as a judicial foreclosure.

When it comes to a deed of trust, the situation slightly differs. First, there are three parties involved in the lending process – the lender, the borrower, and the trustee. The trustee is usually a title company that provides security for the bank on the borrower’s behalf and guarantees a non-judicial process of foreclosure if the borrower defaults. 

This actually means that the trustee has the right to sell the realty and give the money back to the bank without dealing with the court, which accelerates the whole process significantly. 

Foreclosure Procedures Also Differ Significantly 

The deed of trust guarantees that there won’t be a judicial foreclosure process – which is better for the lender since the trustee has a legal title to the property. On the other hand, In case you’re going for a mortgage, the foreclosure will be done in the traditional way, which implies a judge issuing a ruling so the bank can take ownership and resell it. If the loan has been successfully paid off, the borrower is recognized as the realty owner who holds the title.

In case that the amount of money acquired through the foreclosed property auction is not enough to cover the promissory note, the lender can sue the borrower for the remaining balance. Also, an important difference is that the borrower has the right of redemption that grants a repayment period to acquire the realty title. 

The Foreclosure Procedure Related to a Deed of Trust Implies the Trustee Can Sell the Property Without the Borrower’s Permission 

Since the trustee is the legal owner of the real estate, the foreclosure procedure implies it won’t be necessary to go to court, since they are recognized by law as authorized owners in this case. This means that the trustee company doesn’t need permission either from the borrower or the judge. 

After the trust sale is done, the trustee is obliged to pay the remaining amount of debt to the lender. If there is a profit on this sale, the trustee will share it between the lender and the borrower, which gives the borrower the possibility to buy new real estate, for instance. 

Which Way of Buying a Property Would You Prefer? 

Buying realty is definitely one of the biggest steps in everyone’s life, and choosing the right way to do it is vital, especially if you plan to take out a loan. The differences between a mortgage and a deed of trust are huge, and I highly recommend that you think twice before signing an agreement. Choose smart, be cautious, and don’t hesitate to ask me for help if you need any additional information or advice!