Mortgage vs. Deed of Trust
Most of us are accustomed to calling our home loan a mortgage, but that isn't an accurate definition of the term. A mortgage is not the loan, and it is not something that the lender gives you. It is a security instrument that you give to the lender, a contract that protects the lender's interests in your property.
- A mortgage creates a lien on the property and serves as a lender's security for the debt. The lien is recorded in public records, perhaps at your county courthouse, where it tells everyone that a lien exists. The property cannot be transferred until you pay the debt to release the lien.
- There are two parties to a mortgage. You are the mortgagor, or borrower; the lender is the mortgagee.
- When your loan is secured by a mortgage, you keep full title to the property. No one else has rights of ownership.
- A mortgage gives the lender the right to sell the secured property to recover funds if you do not pay the debt. The sales process is called foreclosure.
- When a mortgage is used for security, foreclosure must usually progress through the court system. That type of foreclosure is called a judicial foreclosure.
Over half of the states in the United States use mortgages as security instruments. The other states use a deed of trust, which serves the same purpose ? with a few important differences.
- A deed of trust is not a contract, it is a special kind of deed that is recorded in public records, where it tells everyone that there is a lien on your property.
- A deed of trust involves three parties. You are the trustor, the lender is the beneficiary, and a third party is the trustee, who you can think of as someone who holds temporary (but not full) title until the lien is paid.
The trustee must be a neutral third party, someone who won't favor either you or the lender if problems crop up. In my state of North Carolina , attorneys act as trustees. In other areas, title insurance companies often provide the service.
- The trustee is named on the deed and holds your title in trust until the debt is paid. The trustee cannot take your property for no reason; documents are in place to protect against that.
- The deed of trust is cancelled when the debt is paid.
The Bottom Line
The differences between a mortgage and a deed of trust affect home buyers only when foreclosure is an issue. The trustee has power of sale. If your loan becomes delinquent, the lender will give the trustee proof of the delinquency and ask the trustee to initiate foreclosure proceedings.
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