Should I Use a Mortgage or Deed of Trust?

The Main Difference

The main difference between the two documents, however, deals with how each handles the foreclosure process. Foreclosure is the process the bank uses to take over title to the property when the borrower defaults. Mortgage agreements deal with foreclosure through the court system, which is called judicial foreclosure. A mortgage involves two parties—the borrower and the lender—while a deed of trust involves three parties, including a neutral third-party trustee. By contrast, deeds of trust handle foreclosure outside court, called non-judicial foreclosure, which is much cheaper and faster for the parties involved. Many lenders prefer deeds of trust because the nonjudicial process allows them to foreclose more quickly and with less expense than if the property were foreclosed judicially. The beneficiary in a deed of trust is typically the lender, and the trustee holds the property title until the loan is repaid. Because of this difference, more and more states are converting to using deeds of trust every year. State restrictions and certain circumstances may determine whether a deed of trust or a traditional mortgage is used, and the property title is held differently depending on the instrument.

Understanding the trust vs. mortgage structure is essential for anyone involved in real estate transactions.

The Parties Involved

Another difference is that mortgage agreements do not use a trustee. Instead, the main parties involved are the borrower, lender, and guarantor, if one is used. With a deed of trust, on the other hand, a trustee is also used. The trustee basically holds the deed to the property until the loan has been paid off and then transfers the deed to the borrower. When the borrower pays according to the trust agreement and the loan terms, the trustee releases the home's title to the borrower.

However, if the borrower defaults before paying off the loan, the trustee transfers the deed to the lender who will then foreclose on the property. If the borrower fails to meet the obligations outlined in the mortgage note, the lender may instruct the trustee to sell the property at a public auction, often with the assistance of a title company to ensure proper transfer of property title and distribution of money from the sale. Trust deeds are legal documents that outline the procedures for foreclosure and sale of the property if the borrower defaults.

Promissory Note

A promissory note is a legally binding document that spells out the terms of your mortgage loan, including the amount borrowed, the interest rate, and the repayment schedule. When you take out a home loan, the promissory note is your written promise to repay the lender according to the agreed-upon terms. This document is at the heart of any real estate transaction involving a mortgage or a deed of trust.

In the context of a mortgage or deed of trust, the promissory note works alongside a security instrument—either a mortgage or a deed of trust—to protect the lender’s interests. While the promissory note outlines your obligation to repay the debt, the security instrument determines what happens if the borrower defaults. If you fail to make payments, the lender can initiate foreclosure proceedings, which may be handled through the court system (judicial foreclosure) or outside of court (non-judicial foreclosure), depending on state law and the type of security instrument used.

One of the key differences between a mortgage and a deed of trust is how the property’s legal title is held and who the parties involved are. With a mortgage, the borrower retains legal title to the property, and the lender holds a lien. In contrast, a deed of trust involves three parties: the borrower, the lender, and a neutral third-party trustee. The trustee holds legal title to the property until the loan is repaid in full. If the borrower defaults, the trustee can initiate the foreclosure process on behalf of the lender, often without court involvement, making it a faster and less costly process in many states.

Understanding the terms of your promissory note and the accompanying security instrument is crucial. These documents outline your legal rights and responsibilities, as well as the lender’s options if you default. State law plays a significant role in determining which security instrument is used. Some states, like South Dakota, commonly use deeds of trust, while others prefer traditional mortgages. This makes it essential to review your documents carefully and be aware of how foreclosure proceedings would be handled in your state.

By thoroughly reviewing your promissory note and understanding how it works with your mortgage or deed of trust, you can feel confident in your homebuying process. Knowing your obligations and the lender’s rights helps ensure you are prepared for any situation, whether you are making regular payments or facing unexpected financial challenges.

Which States Use Which Document?

The following lists show which states use which document as of July 2014. An asterisk (*) denotes states that allow the use of either document.

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