{"id":18502,"date":"2020-08-26T09:56:31","date_gmt":"2020-08-26T16:56:31","guid":{"rendered":"https:\/\/www.homelight.com\/blog\/?p=18502"},"modified":"2020-08-26T09:56:31","modified_gmt":"2020-08-26T16:56:31","slug":"buyer-deed-of-trust-vs-mortgage","status":"publish","type":"post","link":"https:\/\/www.homelight.com\/blog\/buyer-deed-of-trust-vs-mortgage\/","title":{"rendered":"Deed of Trust vs. Mortgage: What Are They, And When Do You Need Which?"},"content":{"rendered":"

If you borrowed money to purchase a home, you most likely signed either a mortgage or a deed of trust<\/a>. A mortgage and a deed of trust are similar, but they aren\u2019t exactly the same thing \u2014\u00a0and which one you have likely depends on where you live.<\/p>\n

\u201cA deed of trust is a document that does the exact same thing as a mortgage does,\u201d explains Collier Swecker<\/a>, a top-selling agent based in Alabama.<\/p>\n

\u201cIt\u2019s 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.\u201d<\/p><\/blockquote>\n

So what is the difference, and how does it affect you? Here, we\u2019ll break down the differences, discuss when (or where) you would need each, and why it matters.<\/p>\n

\"A<\/a>
<\/a> Source: (Mike Tinnion \/ Unsplash)<\/figcaption><\/figure>\n

What\u2019s a note vs. a deed vs. a mortgage?<\/h2>\n

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 \u2014 think of it as an IOU.<\/p>\n

A mortgage and a deed of trust are both what are referred to\u00a0 as \u201csecurity instruments,\u201d 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.<\/p>\n

In a mortgage, there are two parties involved<\/a>: the borrower, and the lender. In a deed of trust, there are three parties involved: the borrower, the lender, and the trustee.<\/p>\n

This is a third party without any interest in the house. The trustee\u2019s job is to facilitate an auction if the home forecloses. If the deed of trust is written in a nonjudicial foreclosure<\/a> state and includes a \u201cpower of sale\u201d clause, and the home goes into foreclosure<\/a>, then the lender can foreclose without going to court.<\/p>\n

\u201cIn 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,\u201d Swecker explains.<\/p>\n

Put simply, \u201cNone of us really owns our house until we pay it off.\u201d 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.\u201d<\/p>\n

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 \u201cpower of sale\u201d clause.<\/p>\n

Swecker explains that foreclosure with a deed of trust can be a lot easier to do, \u201cbecause you don\u2019t have to go to court, the deed document has all the language for what would happen if you don\u2019t 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.\u201d It\u2019s simple and fast.<\/p>\n

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\u2019s in default. In a power of sale foreclosure, the lender has the power to foreclose on a property without oversight by the court.<\/p>\n

Each state establishes the terms of these power of sale foreclosures, and each has its own requirements. But as a general rule, here\u2019s 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.<\/p>\n

According to NOLO<\/a>, the states where power of sale foreclosures are permitted and typically used are:<\/p>\n