Deed of Trust vs. Mortgage: Key Differences

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

Whether a home loan is secured by a mortgage or a deed of trust depends largely on state law and local lending practices. 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?

A mortgage is a loan used to purchase or refinance real estate, with the property serving as collateral for the debt. The borrower agrees to repay the loan over time, typically through monthly payments that include principal and interest and may also include property taxes and homeowners insurance.

In a traditional mortgage arrangement, the borrower holds title to the property while the lender places a lien on it. If the borrower stops making required payments, the lender may eventually pursue foreclosure to recover the unpaid balance, subject to state law and the terms of the loan.

Mortgages can have fixed or adjustable interest rates and repayment periods that often range from 10 to 30 years. The exact structure, foreclosure process and legal documents involved can vary by state, which is one reason mortgages and deeds of trust are not used interchangeably everywhere.

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. Since 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

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. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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