Deed of Trust vs. Mortgage

As banks tighten lending standards, more consumers are turning to alternative lenders. The use of a deed of trust assures that the debt is repaid. Discover how it works.

What you will discover:

Obtaining a loan
The Similarities Between a Mortgage and a Deed of Trust

The Differences Between a Mortgage and a Deed of Trust

With banks tightening lending standards in the aftermath of the recent foreclosure wave, an increasing number of consumers are turning to alternative lenders. These lenders are sometimes even relatives and family.

When engaging non-traditional lenders (i.e., not banks), a deed of trust might assist ensure that the loan is returned. A deed of trust acts similarly to a mortgage, but with a few significant changes. We will go through the whole procedure below.

Obtaining a loan

If someone wants to purchase a property, they will almost certainly require a loan. After all, few of us have the cash on hand to buy a home out of our own pockets.

What is vital to realize is that the loan—also known as a promissory note or, more colloquially, a note—is neither a mortgage or a deed of trust. It is only a loan. Once funds are acquired for the purchase of a property, the lender should insure the loan. This is when a mortgage or trust deed comes into play.

The Similarities Between a Mortgage and a Deed of Trust

Overall, both contracts serve the same purpose: they ensure loan repayment by encumbering a property with a lien. A lien provides the lender the right to sell the property if the property is not paid for.

In other words, both papers serve to ensure that the borrower repays the debt. Both papers provide the person or organization the right to sell the property if the borrower fails to satisfy the loan’s conditions.

The Differences Between a Mortgage and a Deed of Trust

A mortgage and a deed of trust vary significantly in two ways. The first consideration is the number of parties involved. The second is what happens if the borrower is unable to pay.

Count of Parties Involved
A mortgage consists of just two parties: the borrower and the lender. A deed of trust, on the other hand, includes a third party called a “trustee” who keeps the title to the residence until the debt is returned. If the loan is not returned, the trustee—often an escrow company—is in charge of initiating the foreclosure process.

What happens if the borrower is unable to pay?
This is the primary distinction between a mortgage and a deed of trust. If a borrower fails to make payments on a mortgage, the foreclosure procedure and property sale must proceed via the courts. The procedure is known as judicial foreclosure, and it entails the lender filing a lawsuit. Both the borrower and the lender may incur costs as a result of this procedure.

However, if a deed of trust is employed, courts may be avoided. This is referred to as non-judicial foreclosure, because it is nearly usually speedier and less expensive. This process is governed by both state legislation and the conditions and procedures outlined in the trust deed.