Mortgage vs. Deed of Trust

When you get a loan to buy a home, you are required to sign a security instrument.  Depending on where you live in the United States, this document could be in the form of a mortgage or a deed of trust.  What's the difference?  The following presents an overview of each instrument to help you answer that question.

Even though most people commonly refer to their home loan as a mortgage, technically this is not an accurate definition.  A mortgage is actually a document that borrowers sign and give to their lender to secure the debt on their home.  It involves two parties -- the borrower (mortgagor) and the lender (mortgagee) -- and it creates a lien against the property that is normally recorded in public records.  Property title/ownership cannot be transferred until that debt is paid in full and the lien released.  The title holder during the loan period can be either the borrower or lender depending on which custom is practiced in the state where the property is located -- "title theory" or "lien theory." In a title theory state, the borrower conveys title to the lender during the loan term.  In a lien theory state, the buyer holds title.

If the borrower fails to repay the loan, the lender can foreclose on the property.  In other words, the lender has the right to sell the property to recover funds.  When a mortgage is the security instrument, the lender usually has to go through a court action to foreclose.  This is called a judicial foreclosure.

Deed of Trust
A deed of trust essentially serves the same purpose as a mortgage; however, there are important differences with respect to parties involved, title holder, and foreclosure process.

Unlike a mortgage, a deed of trust involves three parties -- the borrower, the lender, and the trustee.  The trustee is a neutral third party that holds title until the debt is paid.  Who is eligible to be a trustee varies from state to state.  In some states, attorneys can act as trustees; and in others, title companies provide trustee services.

Another significant difference is in the foreclosure process.  When a deed of trust is involved, foreclosure can be quicker, less expensive, and less complicated than when a mortgage is the security instrument.  If the loan becomes delinquent, the trustee has the power to sell the home.  Of course, the lender must provide the trustee with proof of delinquency and request that foreclosure proceedings be initiated.   And the foreclosure must progress according to law and as dictated by the deed of trust.  However, the foreclosure does not have to go through the court system.

Do You Get To Choose?
The answer is no.  The way your home loan is secured is determined by the law in effect where your property is located.  Therefore, you need to find out which security instrument is used in your state.  You should also check to see which theory is practiced in your state -- title or lien.   This knowledge will help you better understand the relationship between parties involved, how title to your property is held during the loan period, and how foreclosure proceedings would take place if, unfortunately, they were to become necessary.
