Mortgages and Deeds of Trust
What’s the Difference Between a Mortgage and Deed of Trust?
Mortgages and deeds of trust are both agreements in which a borrower puts up title to real estate as security (collateral) for a loan.
Often, people refer to a home or commercial loan secured by real property as a “mortgage,”. But a mortgage isn’t actually a loan agreement. The loan is the promissory note that contains the promise to repay an amount borrowed to buy a home or commercial property.
By contrast, a “mortgage” is a contract between you and the lender that creates a lien on the property. Some states use mortgages to create the lien, while others use deeds of trust or another similar-sounding instrument. The mortgage or deed of trust gives the lender the right to foreclose if you fail to make the monthly payments or breach the loan contract in some other way.
While mortgages and deeds of trust are similar because they’re both agreements in which a borrower puts up the title to real estate as security (collateral) for a loan, these legal instruments do have some differences. For instance, mortgages and deeds of trust differ in the parties involved and, often, how the foreclosure process works.
What Is a Mortgage?
Depending on where you live, you likely either signed a mortgage or a deed of trust when you took out a loan to purchase your home. With a mortgage, the two parties that enter into the contract are:
- the mortgagor (the borrower) and
- the mortgagee (the lender).
Mortgage transfers between banks and other entities are common. When a mortgage is transferred from one party to another, it’s documented and is often recorded in the county records. The document used to transfer a mortgage from one entity to another is called an “assignment of mortgage.”
MERS and Assignments
Mortgage Electronic Registration System, Inc. (MERS) is a company that was created by the mortgage-banking industry to simplify the assignment process.
In many mortgage transactions, the mortgage will designate MERS as a nominee for the lender. In other cases, the loan may be assigned to MERS, solely as a nominee for the lender, at some point later in its life cycle after the loan closes. MERS then acts as an agent for the loan owner, but it doesn’t have a beneficial interest in the promissory note. Rather, MERS simply tracks the mortgage for its members as it is transferred from bank to bank. Once the loan has been assigned to MERS, the loan can be bought and sold any number of times later without recording an additional assignment.
Don’t be surprised if you find out that your mortgage was assigned to MERS at some point. In most cases, there must be an assignment out of MERS’ name before a foreclosure can begin.
The mortgage gives the loan owner the right to sell the secured property through the foreclosure process if the mortgagor doesn’t make the payments or breaches the loan contract in another way.
Judicial foreclosures, which must go through the state court system, are typical in states with mortgages as the security instrument. Though, in a few states that use mortgages, like Alabama and Michigan, foreclosures are ordinarily nonjudicial. In these states, the terms of the mortgage contracts, along with state laws, allow lenders to conduct out-of-court foreclosures of mortgages.
What Is a Deed of Trust?
A deed of trust, like a mortgage, pledges real property to secure a loan. This document is used instead of a mortgage in some states. While a mortgage involves two parties, a deed of trust involves three:
- the trustor (the borrower)
- the lender (sometimes called a “beneficiary”), and
- the trustee.
The trustee is an independent third party that holds “bare” or “legal” title to the property. The trustee’s primary function is to sell the property at a public auction if the trustor defaults on payments.
Deed of Trust Transfers
Like mortgages, when a deed of trust is transferred from one party to another, an assignment is usually is recorded in the county records. Transfers of mortgages and deeds of trust are both referred to as “assignments.”
Deed of Trust Foreclosures
Nonjudicial foreclosures are typical in states that use deeds of trust. The lender can foreclose without going to court if the deed of trust contains a power of sale clause. State law lays out the procedural requirements for nonjudicial foreclosures.
Nonjudicial foreclosures tend to be much quicker than judicial foreclosures.
How to Determine if You Have a Mortgage or a Deed of Trust
To find out whether a mortgage or deed of trust was used to secure your home loan, you can:
- look at the documents you received when you closed escrow on your house
- contact your loan servicer, or
- go to your local land records office and pull up the recorded document. Sometimes these records are available online.