In cases where non-traditional lenders are used (not banks, in other words), using a deed of trust helps make sure the loan is repaid. A deed of trust functions much like a mortgage does, but with a few explicit and important differences. We’ll cover the whole process below.
Securing a loanWhen someone is looking to buy a house, chances are they’re going to need a loan. After all, few of us have the money on hand to purchase property out of pocket.
What’s important to understand is that the loan -- sometimes referred to as a promissory note or, more briefly, a note -- is not a mortgage, nor is it a deed of trust. It’s simply a loan. Once money is secured for the purchase of a home, the lender of that money should protect the loan. This is where a mortgage or a deed of trust comes into play.
Mortgage vs. Deed of Trust: the SimilaritiesOn an overall level, both documents function in the same way: that is, they secure repayment of the loan by placing a lien on a property. A lien gives rights to the lender that, unless the property is paid, the lender has a right to sell that property.
In other words, both documents are used to make sure the borrower pays back the loan. Both documents allow the person or entity to sell the property if the borrower cannot meet the terms of the loan.
Mortgage vs. Deed of Trust: the DifferencesThere are two major difference between a mortgage and a deed of trust. The first is how many parties are involved. The second is what happens in the event that the borrower can’t pay.
Number of Parties Involved
A mortgage has just two parties: the borrower and the lender. A deed of trust, however, has an additional third party, called a "trustee" who holds onto the title of the home until the loan is repaid. If the loan isn’t repaid, the trustee -- often times an escrow company -- is responsible for starting the foreclosure process.
What happens when the borrower can’t pay
This is the major and important difference between a mortgage and a deed of trust. In a mortgage, if the borrower can’t pay, the foreclosure process and the selling of property must go through the courts. This is known as judicial foreclosure and the process involves the lender filing a lawsuit. This can be a costly process for both the borrower and the lender.
If a deed of trust is used, however, courts can be bypassed. This is known as non-judicial foreclosure and it’s almost always faster and less costly. How this process happens is based on both state laws and the terms and procedures laid out in the deed of trust.
If you think a deed of trust is right for you, first make sure your state allows them. Most states do and you can refer to the chart in “Which states allow deeds of trust?” to find out if they’re allowed where you live.