If you finance a home, the lender will have you sign either a deed of trust or a mortgage. A mortgage is an agreement between you and the lender, but a deed of trust adds a neutral third party that holds title to the real estate.
Many states allow either choice. Thanks to an easier foreclosure process, many lenders prefer a deed of trust to a mortgage, so it is important for borrowers to grasp the nuances of these documents.
Mortgage Loans 101
To understand the difference between a deed of trust and a mortgage, it helps to first know some mortgage basics. A mortgage is a loan that’s used to purchase a piece of real estate. First, the borrower applies for a loan from among the different mortgage types. Once approved, they sign a mortgage note, promising to pay the lender back over a specified time with agreed-upon terms. The real estate serves as collateral for the loan.
Note: SoFi does not offer a Deed of Trust at this time.
You may hear a mortgage note referred to as a promissory note. In any case, it’s a legally binding document.
Mortgage Transfer
A mortgage transfer takes place when a borrower assigns what is typically an assumable mortgage to another person. Most mortgage loans are non-transferable. That said, in the case of marital separation, divorce, death, or other unusual circumstance, a mortgage transfer is sometimes permitted.
FHA, VA, and USDA loans, insured by the government and issued by private lenders, are assumable if the buyer qualifies.
Mortgage Foreclosure
When a borrower defaults on making mortgage loan payments as agreed upon, the lender may start legal proceedings to take ownership of the property and resell it to recover funds owed to the financial institution.
A mortgage foreclosure can take place when a borrower doesn’t meet other terms of the agreement, but failing to make payments is the most common reason. A variety of mortgage relief programs help borrowers stave off foreclosure.
What Is a Deed of Trust?
Some states incorporate a deed of trust into their home loan process, while financial institutions in other states can choose to do so or not. A deed of trust is an agreement that’s signed at a home’s closing that states how a neutral third party — typically the title company — will hold legal title to the home until the borrower pays the loan off. (It is not the same thing as the deed to the house.)
Terms to know include the following:
• Trustor: the borrower
• Beneficiary: the financial institution loaning the money
• Trustee: a third party that will legally hold the title until the loan is paid off
Deed of Trust Transfer
If the borrower pays off the mortgage loan, the third-party trustee dissolves the trust involved and transfers the title of the real estate to the borrower.
If the borrower sells the home before the balance owed is paid in full, the trustee takes the sales proceeds and pays the lender what is still owed and gives the borrower/trustor the rest of the money.
Deed of Trust Foreclosure
As with a mortgage, there are clauses in the deed of trust agreement that will trigger foreclosure proceedings. In this case, the trustee will sell the property and distribute the funds appropriately.
Similarities Between a Mortgage and a Deed of Trust
Both a mortgage and a deed of trust are used when someone buys a home and takes out a loan to complete the purchase. Under each structure, the lender has the option to foreclose on the home if terms and conditions agreed upon by the buyer are not met.
In states where either option is allowed, the lender will decide which one to use.
Key Differences Between a Mortgage and a Deed of Trust
Here’s the big one: ease of foreclosure by a private trust company when a deed of trust is in place. But let’s look at how all the differences line up, below.
| Mortgage | Deed of Trust | |
|---|---|---|
| Number of parties | Two: borrower and lender | Three: trustor (borrower), beneficiary (lender), trustee |
| Transfers | Uncommon | Part of the transaction when loan is paid off |
| Foreclosure | Typically involves court | Typically handled outside court system, which is usually faster and less costly |
How to Determine If You Have a Mortgage or a Deed of Trust
Although deed of trust versus mortgage differences may seem reasonably small, it can make sense to be clear about which one you have. Look at a mortgage statement to find your loan servicer and ask.
A longer route: Mortgages and deeds of trust are publicly filed documents, so you could seek out the local government agency that manages these kinds of records and get a copy.
The Takeaway
A deed of trust and a mortgage are the two main systems for securing home loans. One key difference is the presence of a neutral third party in deeds of trust. The trustee holds legal rights over the real estate securing the loan. It’s easy to get lost in the forest of mortgage matters. A mortgage help center can lend a hand.
FAQ
Who can be listed on a deed of trust or mortgage?
On a deed of trust, all three parties are listed: the trustor (borrower), beneficiary (lender), and trustee (third party that holds the title until the loan is paid in full). With a mortgage, there is no third party involved.
How are mortgages and deeds of trust recorded in public records?
A deed of trust will be filed and recorded in public records in the county where the house exists. A similar process takes place for mortgage deed recordings. The recorded documents could be located at a county clerk’s office, a public recorder’s office, or an office of public records.
Is your title separate from deed of trust and mortgage?
Yes. A title is a concept rather than a physical document like a deed of trust or a mortgage note, and it refers to a person’s legal ownership of a home or other property. When a property is sold, the title is transferred from the current owner to the buyer.
Does a mortgage involve a trustee like a deed of trust?
No. Deeds of trust require a trustee, but a mortgage does not.
Photo credit: iStock/zimmytws
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