Mortgage vs Deed of Trust. What you need to know

In This Article

Differences between a Mortgage and a Deed of Trust

The two common methods of securing a loan for real estate in the U.S. are through a Mortgage or a Deed of Trust. While both serve the same purpose of providing security for a loan, there are some key differences between them.

Two major differences:

1. The foreclosure process which is different for each. For a mortgage the foreclosure process involves a judicial process, whereas for a deed of trust, it follows a non-judicial process.
2. For a deed of trust there is the addtion of a third-party trustee which is not required for a mortgage.

Mortgage

A mortgage is a legal agreement between a borrower and a lender that allows the borrower to use the property as collateral for the loan. In a mortgage, there are two parties involved: the borrower (also known as the mortgagor) and the lender (also known as the mortgagee).

Under a mortgage, the borrower holds legal title to the property, but the lender has a lien on the property until the loan is fully repaid. This means that if the borrower fails to make the required payments, the lender has the right to foreclose on the property and sell it to recover the outstanding debt.

In a mortgage, the foreclosure process typically involves filing a lawsuit in court, obtaining a judgment of foreclosure, and conducting a public auction to sell the property.

Deed of Trust

A deed of trust, on the other hand, involves three parties: the borrower (trustor), the lender (beneficiary), and a third-party trustee. The trustee holds legal title to the property on behalf of the lender until the loan is fully repaid.

Unlike a mortgage, a deed of trust does not require a court proceeding to initiate foreclosure. Instead, it allows for non-judicial foreclosure, which means that the lender can foreclose on the property without going to court, as long as the specific requirements outlined in the deed of trust and state law are met.

The foreclosure process for a deed of trust typically involves the lender providing notice of default to the borrower, followed by a notice of sale. If the borrower fails to cure the default, the trustee can proceed with the sale of the property. This process is generally faster than a mortgage foreclosure since it does not involve court intervention.

States that Use a Deed of Trust, a Mortgage, or Both

The use of a deed of trust or a mortgage can vary from state to state. Some states primarily use mortgages, while others primarily use deeds of trust. There are also states that allow for both to be used.

Pros and Cons of a Mortgage

Pros:

1. Legal title: The borrower holds legal title to the property, which can provide a sense of ownership and control.
2. Flexibility: Mortgages can offer more flexibility in terms of loan terms, interest rates, and repayment options.
3. Judicial oversight: The foreclosure process involves court intervention, which can provide some level of protection for the borrower.

Cons:

1. Lengthy foreclosure process: The foreclosure process for a mortgage can be lengthy and costly, involving court proceedings and legal fees.
2. Higher interest rates: Mortgages may have higher interest rates compared to deeds of trust due to the additional legal protections provided.
3. Less flexibility for lenders: Lenders may have less flexibility in terms of foreclosure options compared to deeds of trust.

Pros and Cons of a Deed of Trust

Pros:

1. Non-judicial foreclosure: Deeds of trust allow for non-judicial foreclosure, which can be quicker and less costly compared to mortgage foreclosure.
2. Third-party trustee: The involvement of a third-party trustee can provide an impartial party to oversee the foreclosure process.
3. Lower interest rates: Deeds of trust may have lower interest rates compared to mortgages due to the streamlined foreclosure process.

Cons:

1. No legal title: The borrower does not hold legal title to the property until the loan is fully repaid.
2. Limited judicial oversight: The lack of court intervention in the foreclosure process may provide less protection for the borrower.
3. Less flexibility for borrowers: Borrowers may have less flexibility in terms of negotiating loan terms and repayment options compared to mortgages.

Foreclosure Process for a Mortgage

The foreclosure process for a mortgage typically involves the following steps:

1. Default: The borrower fails to make the required mortgage payments, resulting in default.
2. Notice of default: The lender provides the borrower with a notice of default, informing them of the default and the intent to foreclose.
3. Legal action: The lender files a lawsuit in court to obtain a judgment of foreclosure.
4. Public auction: After obtaining the judgment of foreclosure, the lender conducts a public auction to sell the property and recover the outstanding debt.
5. Transfer of title: If the property is sold at the auction, the title is transferred to the new owner.

Foreclosure Process for a Deed of Trust

The foreclosure process for a deed of trust typically involves the following steps:

1. Default: The borrower fails to make the required loan payments, resulting in default.
2. Notice of default: The lender provides the borrower with a notice of default, informing them of the default and the intent to foreclose.
3. Notice of sale: The lender provides a notice of sale, announcing the date, time, and location of the foreclosure sale.
4. Public auction: The trustee conducts a public auction to sell the property and recover the outstanding debt.
5. Transfer of title: If the property is sold at the auction, the title is transferred to the new owner.

Which is Quicker to Foreclose?

In general, a deed of trust foreclosure is quicker compared to a mortgage foreclosure. This is because a deed of trust allows for non-judicial foreclosure, which does not require court intervention.

In a mortgage foreclosure, the lender needs to file a lawsuit, obtain a judgment of foreclosure, and go through the court process, which can be time-consuming. On the other hand, a deed of trust foreclosure can proceed more swiftly as long as the specific requirements outlined in the deed of trust and state law are met.

However, it’s important to note that the foreclosure timeline can vary depending on the state and the specific circumstances of the case. Some states have laws that impose specific timeframes for foreclosure, while others may have longer or more complex processes.

Further Reading on Foreclosure:

• Foreclosure: What Private Lenders and Hard Money Lenders Need to Know
• Expert Guide to the Judicial Foreclosure Process
• Expert Guide to the Non-Judicial Foreclosure Process
• What you need to know to Evaluate Foreclosure Losses

[wpcode id=”6346″]