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Deed of Trust vs. Mortgage

When buying a home, it’s easy to get lost in the terminology. Understanding key terms and requirements can become confusing. For example, some states require a deed of trust while others require a mortgage. But, what’s the difference? While your state dictates which one you need, the number of parties involved in your financial process will change depending on the type of loan you must use. So, to understand the critical differences between a deed of trust and a mortgage, here’s what you should know.

Consider working with a financial advisor on your long-term financial plan as you buy or sell real estate.

What Is a Deed of Trust?

Deeds of trust and mortgages secure loans by putting real estate titles up for collateral. Essentially, both state that the borrower will repay the loan, and the lender will hold the title of the property until the entire loan is repaid in full.

Some state states actually require a deed of trust instead of a mortgage. So, in these instances, there are three parties involved:

  • The trustor (borrower)
  • Trustee (party holding the legal title)
  • Beneficiary (lender)

A deed of trust needs to entail many aspects and particulars that include:

  • Property description
  • The original amount of the loan
  • The maturity and the inception date
  • All the parties’ names that are involved
  • Fees involved
  • What happens if the borrower defaults
  • More depending on the sale itself

To obtain a deed of trust, the trustor must give the beneficiary one or more promissory notes. A promissory note is a legal document signed by the borrower stating that you promise to pay the debt. The loan terms are provided in the deed of trust, including the interest rate and other obligations.

Once this is repaid in full, the promissory note will be marked “Paid in Full.” Then, the buyer will be given back the deed. The lender keeps the promissory note until it is repaid; the buyer gets to keep a copy for records purposes.

States Using Deed of Trust

Deeds of trust are used instead of mortgage loans in these states:

  • Alaska
  • California
  • Colorado
  • District of Columbia
  • Georgia
  • Hawaii
  • Idaho
  • Maine
  • Massachusetts
  • Minnesota
  • Mississippi
  • Missouri
  • Nebraska
  • Nevada
  • New Hampshire
  • New Mexico
  • North Carolina
  • Oregon
  • Rhode Island
  • Tennessee
  • Texas
  • Utah
  • Virginia
  • Washington
  • West Virginia
  • Wyoming

In Alabama, Arizona, Arkansas, Illinois, Kentucky, Maryland, Michigan, Montana and South Dakota, the lender has the choice of either a mortgage or deed of trust. In any other state, you must have a mortgage.

What Is a Mortgage?

Deed of Trust vs. Mortgage

A mortgage is a loan you take out to finance buying your home, just like a deed of trust. When you take out a mortgage, you agree to pay back the money you have borrowed per the contract’s terms. When it comes to a mortgage, two parties are usually involved: a traditional lending institution, such as a bank, and the borrower purchasing the home.

The home you purchase is used as collateral if you break your payment agreement or default on your loan. If this happens, the bank can foreclose on your home and seize or sell it. More specifically, a loan isn’t technically a mortgage until you make a lien on your home. This, in return, turns the ownership of your home into collateral. Then, once you repay the loan, you become the owner again.

Deed of Trust vs. Mortgage: Similarities

You can use a deed of trust or mortgage to purchase a home. However, your state will decide which one you must use. Because both are used to purchase a property, they have several similarities, including:

  • The lender can foreclosure on your home if you default on payments: The purpose of each financing option is the same. While the details may differ, both stipulate that your lender can foreclose your home to recuperate their loss if you don’t follow the loan’s payment terms.
  • The state determines the type of financing option: For example, the state you live in usually determines whether you use a deed of trust or a mortgage. However, some states like Alabama and Michigan allow both. So, if you live in one of these states, your lender will decide which financing option to use.

Deed of Trust vs. Mortgage: Differences

While a mortgage and a deed of trust have similarities, they also have a few things that set them apart. Here’s a breakdown of some of the most important differences:

  • The individuals involved in the financing process: Usually, a mortgage only has two parties involved – the lender and borrower, whereas a deed of trust has an additional party. The other party is the trustee who keeps the home’s title until the loan is paid off. If you default on the loan in a deed of trust, the trustee will start the foreclosure. The foreclosure process with a deed of trust is different from a traditional mortgage since, with a mortgage, the lender initiates the foreclosure process.
  • The type of foreclosure: If you have a deed of trust, you will usually have a nonjudicial foreclosure. On the other hand, the courts will typically be involved if you have a mortgage.
  • Foreclosure details: When your lender forecloses with a deed of trust, the process will usually take less time and money to complete. However, foreclosure with a mortgage can be a lengthy process since you must go through the courts. Therefore, it can eat up a lot of time and money. For this reason, many lenders try to go the nonjudicial route.

Bottom Line

Deed of Trust vs. Mortgage

While there are several differences between the deeds of trust and mortgages, the purpose of each loan is the same, to purchase a home. No matter which option is available to you, as the homeowner, you’re responsible for making on-time payments until it is paid in full. Also, you’ll want to become familiar with the mechanics of your loan, so there are no surprises along the way. Speaking with your lender can help clear up any confusion.

Tips on Mortgages

  • If you have additional questions about what your deed of trust means or how it differs from a mortgage, consider chatting with a financial professional. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Take advantage of our no-cost mortgage calculator to get a quick estimate your monthly mortgage payment with taxes, fees and insurance.
  • Use SmartAsset’s mortgage comparison tool to compare mortgage rates from top lenders and find the one that best suits your needs.

Photo credit: ©iStock.com/Prostock-Studio, ©iStock.com/MF3d, ©iStock.com/Lokibaho

Ashley Kilroy Ashley Chorpenning is an experienced financial writer currently serving as an investment and insurance expert at SmartAsset. In addition to being a contributing writer at SmartAsset, she writes for solo entrepreneurs as well as for Fortune 500 companies. Ashley is a finance graduate of the University of Cincinnati. When she isn’t helping people understand their finances, you may find Ashley cage diving with great whites or on safari in South Africa.
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