Deed of Trust vs Mortgages Explained

When real estate in the United States is purchased with the use of financing, the borrowing is documented by a mortgage or a trust deed, depending on what state the transaction takes place in.

The following discussion focuses on trust deeds and highlights the difference between a trust deed and a mortgage.

A trust deed (also known as a deed of trust), is an agreement between a borrower and a lender to have a property held in trust by an independent third party until the loan is paid off.

It is the means by which a security interest is created in real estate.  

Trust deeds involve three parties:

• a borrower (known as the trustor)
• a lender (known as the beneficiary)
• and an independent third party trustee (usually a bank, escrow company or title company)  

Legal title to the property is held by the trustee on behalf of the lender.

While the trust deed provides that the trustee will acquire and hold legal title to the property, it does not include a promise to pay.

For that reason a trust deed is usually accompanied by a promissory note.  

The promissory note is the borrower's promise to pay until the loan is paid in full.

The right to obtain full ownership, known as equitable title, is held by the borrower.

It includes the right to use and maintain the property.

Once the borrower has re-paid the loan in full, they become the owner of the property.  

This is documented by a reconveyance deed prepared by the trustee.

In order to avoid confusion regarding ownership and security interests in a property, it is advisable to have a title company record all pertinent documents associated with a trust deed in the county where the property is located.  

This includes the original trust deed, the promissory note and the reconveyance deed.

If the borrower defaults on a trust deed, the trustee can foreclose on the property without going to court.  

In the event a default occurs, the lender will instruct the trustee to begin foreclosure proceedings.

The language contained in the trust deed provides for non-judicial foreclosure (these laws can differ from state to state).

Non-Judicial Foreclosure

Non-judicial foreclosure means it’s unnecessary for a lender to sue a borrower in state court to foreclose on a property.  

Here’s how it works:

• At the instruction of the lender, the trustee publishes and records notices in accordance with state laws.
• If the borrower fails to satisfy past due payments, a trustee sale is initiated and the property is auctioned off to the highest bidder.
• At that time the borrower’s equitable title disappears in accordance with case law or applicable statues.
• A new deed is prepared by the trustee transferring legal and equitable title of the property to the new owner.
• The new owner records the deed making them the owner on record.

The time period from the beginning of the foreclosure process to the trustee sale depends on state foreclosure law.

Click here for state by state foreclosure timelines.

Non-Judicial Foreclosure Example in California

The foreclosure process in California begins when the trustee records a notice of default, regardless of how long the loan has been delinquent.

The foreclosure process ends approximately four and a half months later.

Upon the sale of the property, the trustee is responsible for distributing the proceeds to the lender. 

Once the debt is satisfied any remaining proceeds are given back to the borrower.

In the case of non-judicial foreclosure, once the property is sold, the borrower cannot repay the loan and retain ownership of the property (unlike judicial foreclosure).

Thus, the non-judicial foreclosure process is quicker and less expensive than the judicial foreclosure process.

There are a few significant differences between trust deeds and mortgages.  

While a trust deed involves three parties, a mortgage involves only two: 

• a borrower (known as the mortgagor)
• and a lender (known as the mortgagee)

The most noteworthy difference between a trust deed and a mortgage is the process of foreclosure.  

Judicial Foreclosure

• When a borrower defaults on a mortgage the lender files a lawsuit and initiates a time consuming process known as judicial foreclosure.  
• The foreclosed property is sold to the highest bidder at auction. 
• In the event the sale price falls short of the amount owed on the promissory note, the lender has the right to file a second lawsuit, known as a deficiency judgment. It provides the lender with a means of recovery for monies still owed after the sale of the property. 

If the lender wins in judicial foreclosure and obtains a deficiency judgement, the borrower can still retain the property by exercising their “Right of Redemption.”

The Right of Redemption

The right of redemption allows the borrower to reclaim the property within a specific time period.

• The borrower is given seven months from the date of service to extinguish the loan. This can be accomplished by refinancing or selling the property.  
• The redemption period allows the borrower to retain the property provided they have the capacity to do so.  

Thus, the lender can spend a great deal of time and money in judicial foreclosure and in doing so would have been much better off signing a trust deed.

Trust deeds and mortgages are similar contracts but when you get down to the nitty gritty, if things go awry; things can be settled more quickly with a Trust Deed.