If you borrowed money to purchase a home, you most likely signed either a mortgage or a deed of trust. A mortgage and a deed of trust are similar, but they aren’t exactly the same thing — and which one you have likely depends on where you live.
“A deed of trust is a document that does the exact same thing as a mortgage does,” explains Collier Swecker, a top-selling agent based in Alabama.
“It’s recorded at the courthouse and it puts everybody on notice that there is a liability on the property. Different states do different things, but they are almost the same.”
So what is the difference, and how does it affect you? Here, we’ll break down the differences, discuss when (or where) you would need each, and why it matters.
What’s a note vs. a deed vs. a mortgage?
A promissory note, or note, is the loan to buy the house. This is the document that the buyer signs that promises to repay the loan — think of it as an IOU.
A mortgage and a deed of trust are both what are referred to as “security instruments,” in other words: documents that protect the lender if the buyer defaults on the loan. Both mortgages and deeds of trust place a lien on the house. If the buyer fails to repay the loan, the lender can sell the house to recoup some of their investment.
In a mortgage, there are two parties involved: the borrower, and the lender. In a deed of trust, there are three parties involved: the borrower, the lender, and the trustee.
This is a third party without any interest in the house. The trustee’s job is to facilitate an auction if the home forecloses. If the deed of trust is written in a nonjudicial foreclosure state and includes a “power of sale” clause, and the home goes into foreclosure, then the lender can foreclose without going to court.
“In a mortgage, there are two parties involved, the borrower and the lender. And in a deed of trust, there is a trustee that holds theoretical title until the loan is paid off,” Swecker explains.
Put simply, “None of us really owns our house until we pay it off.” With a deed of trust, the buyer theoretically possesses the title, but then he conveys that title to the trustee, who holds it for the benefit of the lender.”
Why are there three parties versus two in a deed of trust? Well, deeds of trust allow lenders to expedite a foreclosure in non-judicial states. In these states, lenders can foreclose without going to court if they have the “power of sale” clause.
Swecker explains that foreclosure with a deed of trust can be a lot easier to do, “because you don’t have to go to court, the deed document has all the language for what would happen if you don’t pay it, and generally you can bypass having to go get permission from the court. You do exactly what it says and the trustee sells it.” It’s simple and fast.
In a power of sale clause written into the deed of trust or mortgage, the buyer pre-authorizes the sale of property through a nonjudicial foreclosure to pay off the loan if it’s in default. In a power of sale foreclosure, the lender has the power to foreclose on a property without oversight by the court.
Each state establishes the terms of these power of sale foreclosures, and each has its own requirements. But as a general rule, here’s what would happen: After not making payments, the buyer defaults on the loan. Then, the lender gives limited notice of the foreclosure. After that, a trustee is permitted to sell it at a foreclosure sale. The lender must follow the timeline and specific rules.
According to NOLO, the states where power of sale foreclosures are permitted and typically used are:
- District of Columbia (sometimes)
- Hawaii (sometimes)
- New Hampshire
- North Carolina
- Rhode Island
- South Dakota
- West Virginia
How do you know whether you have a deed of trust or a mortgage?
First, check the list to see whether the state where you live allows nonjudicial foreclosure. Of course, your specific terms will also be noted on your loan documents, so you can dig those up and read them to explicitly clarify.
To be sure, you also might contact your loan service officer. Or, you can check your local records office. A Google search for the office in your local region should pull up specific instructions on where to go and how to make the request where you live.
Does it matter whether you have a deed of trust or a mortgage?
“I don’t think it matters if the buyer knows what they have, because there’s not one thing in a mortgage or a deed of trust that’s in the borrower’s favor,” Swecker explains. “It’s all saying how the lender is going to get your property back if you don’t pay your bill.”
He explains that neither document provides more protection to buyers per se; it only comes into play when a foreclosure happens.
“If I were a homeowner in trouble and trying to put a game plan together, I would learn whether I have a deed of trust or a mortgage and learn how to react to that,” Swecker says.
At the end of the day, if you have a deed of trust, it means that a lender can foreclose on your home a bit more easily and quickly, given the lack of judicial involvement. It’s not up to you to decide what you have — it’s a matter of your state’s practice — but at least you should know what you’re going into when you sign, and how to react should you find yourself in foreclosure.
And a word to the wise so you can avoid that unfortunate situation altogether before it becomes a problem: “I make a living off selling houses,” Swecker says. “But there are also reasons not to buy a house if you’re not ready — or not to buy that house in that neighborhood.”
In short, buy a home within your means, and it won’t really matter whether you have a deed of trust or a mortgage.
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