There are numerous phrases and terms you’ll hear during the home-buying process that may be unfamiliar. While you’ve undoubtedly heard the term “mortgage,” you may not realize how it differs from a deed of trust. Let’s look at the differences and talk about when to use one over the other.
Why Is There Confusion?
Both mortgages and deeds of trust are legal terms used in the real estate market. Both are contracts that deal with lenders being able to secure that a loan will be repaid. In short, the two terms serve the same purpose. However, they are different animals.
What Is a Mortgage?
Mortgages are agreements between two parties. When buyers want to use a loan to pay for a property, they ask lenders for a mortgage. The terms state buyers will pay lenders back over time until the loan is satisfied. Mortgages are secured debts and use the property as collateral.
What Is a Deed of Trust?
A deed of trust is an agreement among three parties: the beneficiary (lender), trustor (borrower), and the trustee. The trustee is a neutral third party who releases the loan once it’s paid in full. They can also start a foreclosure on a property if the trustor fails to make timely payments.
How Do They Differ?
There a few distinct differences between a mortgage and a deed of trust. Here are three ways they vary.
- Number of parties involved. A mortgage only involves the buyer and lender. A deed of trust adds the trustee to the mix.
- The foreclosure process is different. When a borrower fails to pay a mortgage loan, the lender starts a judicial foreclosure. When a trust doesn’t fulfill the terms in a deed of trust, the trustee initiates a nonjudicial foreclosure.
- The foreclosures cost different amounts. When a property with a mortgage is foreclosed upon, the lender gets a deficiency judgment. This process can take a long time and be costly. In contrast, with a deed of trust, the trustee has the authority to sell the property and settle the debts without going to court. This process usually goes faster and is less expensive than what’s required by a mortgage.
When Should You Use One Over the Other?
Your state will decide which one you use to finance your property. Some states require mortgages while others only use deeds of trust.
The broad goal of both contracts is to nail down financing to purchase a property. However, deeds of trust and mortgages aren’t terms that should be used interchangeably. Talking to your lender will help you sort out which one you’ll use for your mortgage and how the process works.