What is the Difference Between a Trust Deed and a Mortgage?
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A deed of trust has become an alternative way to obtain real estate financing. In some cases, it is because banks and mortgage companies have tightened up lending rules. In other cases, it is because borrowers do not care to submit to the entire process of qualifying for a traditional mortgage. If you have had to qualify for a mortgage recently, you know that it can take answering a lot of intrusive questions, weeks of your time, and a mountain of paperwork.
Deed of Trust vs. Mortgage
While a deed of trust is actually similar to a traditional mortgage because they both represent the paperwork needed to secure a loan, there are some important differences between a trust deed and a mortgage to consider. Also, the actual loan is still simply a loan. These two terms – trust deed and mortgage – represent the paperwork that is needed to secure that loan.
This is how a trust deed and a mortgage are similar:
- They both represent the documentation needed to secure a real estate loan.
- They both secure a lien on a piece of property for a lender, so the lender has the right to sell the property if the borrower defaults on the loan.
This is how a deed of trust and a mortgage are different:
- With a mortgage, the borrower and the lender are the only two parties involved.
- With a trust deed, an additional third party is added to the mix: the trustee, and it is the trustee’s duty to hold the title until the loan gets paid back. If the loan defaults, it is also the trustee’s duty to begin foreclosure.
- The biggest difference between a mortgage and deed of trust is how the foreclosure process begins after a borrower defaults.
Mortgage Foreclosure: With a mortgage, the process of beginning foreclosure proceedings must go through the courts. The lenders must file a judicial foreclosure lawsuit, and this process is probably even more time consuming and expensive than getting a mortgage in the first place.
Deed of Trust Foreclosure: With a trust deed, the process of foreclosing is much simpler. There is no need to go to the courts, and the trustee can begin the process. That makes the entire process of foreclosing on properties with a deed of trust much simpler and easier for lenders.
Note that the exact foreclosure rules might depend upon the state, and deeds of trust are not allowed in every state. Alternatively, in some states only trust deeds are allowed, and they do not allow mortgages. That means that many people may refer to the documents securing their home as a mortgage, but they may legally actually be trust deeds.
The Advantage of Deeds of Trust for Lenders
By now, the advantage of a trust deed should be obvious. To foreclose, lenders do not have to go through the court system. This makes the process much faster and easier. Of course, even though a trust deed foreclosure does not need to be a judicial foreclosure, borrower’s still have rights, and these differ by state.
Typically, the terms of a foreclosure are outlined in the original contracts. Even though a trust deed does not require a judicial foreclosure, borrowers still have legal recourse if the lender clearly violates the contract.