How is a Mortgage Different from a Trust Deed?
A mortgage and deed of trust (otherwise known as a “trust deed”) are legal instruments in real estate that allow a lender to secure repayment of a loan. Although a mortgage and a trust deed serve the same purpose, the exact terms of both of each varies. The real estate attorneys at Talkov Law are deeply familiar with the intricacies of both and can explain each in more detail.
What is a Mortgage?
A mortgage is an agreement between a borrower and a lender to purchase real property wherein the borrower agrees to repay the lender over time, usually over monthly installments. The property serves as collateral for the loan in the event that the borrower defaults on the loan. Unlike a judgment lien, a mortgage is a type of voluntary lien against a property.
If a borrower fails to make timely payments, the lender may foreclose on the property, which is usually followed by evicting the residents, then selling the property.
What is a Deed of Trust?
A trust deed serves the same purpose as a mortgage – both are methods of using a piece of property as collateral to secure a loan. However, unlike a mortgage, a deed of trust requires 3 parties: a beneficiary, a trustor, and a trustee.
Beneficiary: A beneficiary, also known as a lender, is the legal entity that lends the borrower the money for the property. The beneficiary will be repaid the event of a foreclosure.
Trustor: The trustor is the person (or people) who borrowed the money, also known as the borrower.
Trustee: The trustee is the neutral, third party who will eventually release the loan once it is fully paid or, in the event it is not paid, will proceed with the foreclosure process. A trustee is usually a title or escrow company.
A trust deed also works in conjunction with a promissory note. The promissory note contains all relevant information related to the loan and is held by the beneficiary until the loan is completely paid off. Only the trust deed itself, not the promissory note, need be recorded with the county clerk.
An important distinction between a “deed” (such as a grant deed or a quitclaim deed) and a “deed of trust” is that a deed of trust does not transfer ownership of a real property like a typical deed does. Similarly, a “trust deed” has nothing to do with living trusts. The term “trust deed” is quite the misnomer as the trustee is often said to hold only naked title, holding no true (equitable) ownership of the property.
Similarities Between a Mortgage and a Trust Deed
Both a mortgage and a trust deed are agreements in which a borrower agrees to pay back a specific amount of money and a lien is placed on a borrower’s property to ensure repayment. Importantly, neither a mortgage nor a trust deed are loans on their own.
Both also give the lender the ability to reclaim the home via a foreclosure. The specifics vary between the two, but both a mortgage and a trust deed allow a lender to foreclose on the home, sell it, and pay off the remaining balance on the loan.
Differences Between a Mortgage and a Deed of Trust
There are a few key differences between mortgages and deeds of trust.
First, a trust deed is different from a mortgage in the number of parties involved in the contract. A mortgage has two parties: a lender and a borrower. A trust deed has three parties: a beneficiary (lender), a trustor (borrower), and a neutral, third party known as the trustee (usually a title or escrow company).
Next, in the event of nonpayment of the loan, the foreclosure type is different in a mortgage than it is in a trust deed. A mortgage involves judicial foreclosure initiated by a lender. By contrast, a nonjudicial foreclosure usually occurs with a deed of trust. Nonjudicial foreclosures are the most common foreclosure process in California.
Finally, the length of time and expense for a judicial foreclose and a nonjudicial foreclosure vary drastically. A judicial foreclosure that occurs with a mortgage consists of the lender going to court to get a deficiency judgment to foreclose on a home. This may lead to a time consuming and expensive foreclosure process. On the other hand, a nonjudicial foreclosure that occurs with a trust deed is instead performed by the trustee (usually an escrow company). The trustee has the authority to sell the home and pay off any remaining loan balance if the borrower defaults without going to court. This process is almost always less expensive and time consuming than a judicial foreclosure.
Contact a Real Estate Attorney
This is just a broad overview of the differences between mortgages and deeds of trust. You should be sure to carefully review your mortgage or deed of trust documents carefully, preferably with a loan advisor, real estate agent, or a real estate litigation attorney. Those who are deeply familiar with such documents can help you better understand the specifics of your home purchase contract, whether it be a mortgage or a trust deed.