A deed of trust and a mortgage both enable your lender to reclaim your property if payments are not made. While they are similar in nature, there are key differences between the two. For example, a deed of trust involves three parties, while a mortgage has two. Deeds of trust are not available in all states. However, lenders tend to prefer deeds of trust, which allow them to perform a cheaper and faster nonjudicial foreclosure process.
When reaching the end of your new home search, your lender may show you a deed of trust. If you’ve only heard about mortgages, this may sound unfamiliar and leave you with a lot of questions. Is a deed of trust the same as a mortgage? Is one better than the other? It’s important to know the differences between the two, and why some lenders prefer trust deeds over mortgages.
A deed of trust and a traditional mortgage are both designed to help lenders. In both documents, the borrower promises to make payments on time and lists the property as collateral. However, there are five major differences between the two documents. Why do these differences matter? This article answers that question and more through a thorough comparison of a mortgage and a deed of trust.
What are the major differences between these documents?
The five main differences between a deed of trust and a mortgage are:
- A mortgage is a loan, while a deed of trust is not.
- Both have a different number of parties involved.
- A mortgage has a judicial foreclosure and a deed of trust has a nonjudicial foreclosure.
- Deeds of trust are usually faster and cheaper for the lender.
- Deeds of trust are not available in every state.
What is a deed of trust?
A deed of trust (also known as a trust deed) involves a trustor, beneficiary, and trustee.
- The Trustor agrees to pay back the beneficiary. In a real estate transaction, the trustor is the borrower.
- The Beneficiary, referred to as the lender in a real estate transaction, transfers financial backing and security interest to a third-party trustee.
- The Trustee is a third-party member who holds the legal title to the home. The trustee controls the beneficiary’s investment interest if the borrower stops paying their mortgage bills. They can sell the home on behalf of the lender.
A deed of trust is a legal agreement between a trustor and beneficiary made at the end of the home buying process. The beneficiary (or lender) agrees to give the trustor (or borrower) money in exchange for a promissory note.
While the borrower makes payments to the lender, the trustee holds the legal title of the property. If the trustor pays off the loan, then the trustee transfers the property’s title to the trustor and terminates the trust. On the other hand, if the borrower cannot afford or ceases making mortgage payments, the trustee is responsible for the foreclosure process.
Who is listed on a deed of trust?
A deed of trust lists all parties involved, including the trustee, trustor, and beneficiary.
Can you gain equity with a trust deed?
Provided that mortgage payments continue, the deed of trust grants the trustor to live on the property and gain equity. Even though the trustor doesn’t own the property’s legal title, they do own the equitable title. This means the trustor enjoys any increase in property value and other benefits obtained through the property.
What is a mortgage?
A mortgage loan is an agreement between a borrower and a lender. The lender agrees to give money to the borrower with the promise they will pay it back within a certain time. If the borrower defaults on the payments, the lender begins the foreclosure process. A mortgage loan involves only a lender and a borrower, and no third parties are involved.
How does a deed differ from a mortgage?
A deed is not a loan. A property’s deed identifies ownership and may transfer ownership of a home to the buyer. Anyone identified on the deed is an owner of the property.
A mortgage is a loan and gives the lender security interest until the loan is paid back in full.
Deed of trust vs. mortgage
Both a mortgage and trust deed allow your lender to reclaim the property through foreclosure. However, there are a few key differences between these legal documents.
Five key differences
- Document purpose. Only a mortgage is a loan. A deed of trust is not a type of loan.
- Parties involved. A mortgage involves just two parties. A trust deed has three parties involved.
- Type of foreclosure. The foreclosure type influences the foreclosure process. A mortgage has a judicial foreclosure. This means the lender must begin the foreclosure process through the courts. On the other hand, a deed of trust has a nonjudicial foreclosure.
- Expense. The foreclosure process with a mortgage loan is an expensive and lengthy process. This is why many lenders choose a deed of trust when possible. It takes less time and money to reclaim property under a deed of trust due to its nonjudicial process.
- Availability. A mortgage is available in all states, but a deed of trust is only available in certain states.
Which states use deeds of trust?
The following states use a deed of trust:
It’s important to remember that the states listed above don’t only use deeds of trust or a nonjudicial process, just primarily. You can still receive a mortgage or a judicial process in any state.
What is the advantage of a trust deed over a mortgage?
The main advantage is for the lender. Because a deed of trust uses a nonjudicial foreclosure, a lender isn’t required to go to court for the foreclosure process. This saves a lot of time, money, and is overall easier for the lender.
Unfortunately, there aren’t any clear advantages for borrowers as both documents offer lenders a way to reclaim their investment (your property).
If talking about mortgages and deeds of trust has you excited to purchase a home loan, look no further! SuperMoney combines the knowledge and experience of both borrowers and lenders in our reviews of home loan offers. Check below to get started.
What is included in a deed of trust?
When a trustor agrees to a deed of trust, the trustor signs a promissory note outlining the financial specifics for repayment. The deed of trust, on the other hand, outlines the terms of the real estate transaction, which includes the information below:
Original loan amount
The initial loan amount is the total number that the beneficiary gives the trustor to buy the home. It’s usually the purchase price with the down payment subtracted. This is the amount that the borrower pays off.
This section also reviews how the loan will be repaid and any additional interest or loan fees.
Description of property
The next section is a detailed description of the property, similar to what you might see in a deed. This description also outlines what the trustor has rights to on the property as long as loan payments continue.
This refers to the length of time the borrower has to pay off the loan. This is also known as a loan term. Most large institutions suggest loan terms between eight and 30 years, but the loan term may differ depending on what the parties agree to.
Requirements of the loan
This section lists all conditions and requirements imposed by the beneficiary. Some lenders require the borrower to use the home as their primary residence for an allotted amount of time. Others may have the borrower pay mortgage insurance.
You’ll also find penalties listed in this section. While not true of every trust deed, some list prepayment penalties that discourage trustors from paying the full loan amount back prior to the deadline.
Power of sale clause
A power of sale clause defines when a trustee can sell the property for the beneficiary. This usually happens after foreclosure. Because a trust deed uses nonjudicial foreclosures, courts aren’t involved. However, if someone does not follow the rules stated in the power of sale clause, then a courtroom visit may be necessary.
Acceleration and Alienation Clauses
You’ll likely see both clauses in a deed of trust, and even though they sound similar, different situations kickstart these clauses.
- Accelerated clause. This clause comes into play when the borrower fails to make payments. Depending on the trust terms and the lender, this clause may start after one missed payment. However, this isn’t always the case, as some lenders prefer the clause to begin only after multiple payments are missed and a notice of default is drafted.
- Alienation clause. This clause prevents someone from purchasing the property under the current loan terms. Also known as a due-on-sale clause, the alienation clause may require you to repay the full loan amount before selling the property or prohibit you from owning the property through a limited liability company. This ensures the lender that only the original borrower is accountable under the deed of trust.
How can I tell if I have a deed of trust or a mortgage?
If you’re not familiar with both documents, it can be difficult to tell which is which. Fortunately, there are several places that can tell you whether you have a mortgage or a trust deed:
- Lending services. If you feel comfortable speaking with your lender, they’ll be able to clarify whether you have a mortgage or a trust deed.
- Communication about the loan. You and your lender can check your discussions regarding the agreement if you can’t find your loan documents.
- Physical documents. Your loan documents should state “deed of trust” or “mortgage” in the title.
- County clerk office. Most county clerks have records of deeds and mortgages on file. You can access this online or contact your county’s clerk office.
- Both mortgages and deeds of trust ensure the lender can reclaim the property in a foreclosure.
- A trustor, beneficiary, and trustee are all in a deed of trust, but only a lender and borrower are in a mortgage.
- While a mortgage can be found in any state, a deed of trust is only available in select states.
- A deed of trust documents the loan amount, property’s description, length of the loan, and loan requirements.
Where to find your ideal lender
Are you ready to buy your dream house? The best way to get started is with a home loan that fits your financial needs. At SuperMoney, we think this should be the easy part. We’ve researched popular mortgage lenders from across the country, which you can find right here.
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- Foreclosure Process — U.S. Department of Housing and Urban Development
- Deed of Trust/Mortgage — Consumer Financial Protection Bureau
- 2021 Mortgage Industry Study — SuperMoney
- Best Mortgage Lenders | February 2022 — SuperMoney
- Home Purchase Mortgages: Reviews & Comparisons — SuperMoney
- What is a Wraparound Mortgage? — SuperMoney
- What is a Participation Mortgage? — SuperMoney
- What is a Subprime Mortgage? — SuperMoney
- What is a Balloon Mortgage? — SuperMoney
Camilla has a background in journalism and business communications. She specializes in writing complex information in understandable ways. She has written on a variety of topics including money, science, personal finance, politics, and more. Her work has been published in the HuffPost, KSL.com, Deseret News, and more.