Over half of the states in the United States use mortgages as security instruments. The other states use a deed of trust, which serves the same purpose, but with a few important differences. Let’s define each of these two important documents used in the foreclosure process.
MORTGAGE: What is a Mortgage?
Most of us are accustomed to calling our home loan a mortgage, but that isn’t an accurate definition of the term. A mortgage is not a loan, and it is not something that the lender gives you. It is a security instrument that you give to the lender, a document that protects the lender’s interests in your property.
There are two parties to a mortgage:
- the mortgagor – the borrower, and
- the mortgagee – the lender
A mortgage document creates a lien on the property, which serves as a lender’s security for the debt. The lien is recorded in public records, at your county courthouse.
Even if your loan is secured by a mortgage, you still have full title to the property. No one else has rights of ownership. A mortgage gives the lender the right to sell the secured property to recover funds if you do not pay the debt.
When a mortgage is used for security, foreclosure must usually progress through the court system. That type of foreclosure is called a judicial foreclosure.
DEED OF TRUST: What is a Deed of Trust?
A deed of trust serves the same purpose, but with a few important differences.
A deed of trust is a special kind of deed that is recorded in public records, where it tells everyone that there is a lien on property. Since deed of trust contains a power-of-sale provision, the deed of trust lender can sell the property at a trustee’s sale – without prior review by court. That process is called a non-judicial foreclosure.
A deed of trust involves three parties. The borrower who is the trustor, the lender is the beneficiary, and a third party is the trustee.
A trustee is someone who holds temporary (but not full) title until the lien is paid.
The trustee should be a neutral third party, someone who won’t favor either you or the lender if problems crop up. In some states, attorneys act as trustees, and in others, title insurance companies often provide the service.
The trustee cannot take your property for no reason–documents are in place to protect against that.
The deed of trust is cancelled when the debt is paid.