To fully understand the difference between a mortgage and a deed of trust, you must first understand promissory notes.
Homebuyers usually think of the mortgage or deed of trust as the contract they are signing with the lender to borrow money to purchase a house. But that’s actually not the case. It’s the promissory note that contains the promise to repay the amount borrowed. (Learn more about promissory notes.)
While a promissory note is basically an IOU that contains the promise to repay the loan, the mortgage or deed of trust is the document that pledges the property as security for the loan. It is the mortgage or deed of trust that permits a lender to foreclose if you fail to make the monthly payments or breach the loan contract in some other way.
Often, people refer to a home loan as a “mortgage,” but a mortgage is not actually a loan. The mortgage is a document that you give to the lender that creates a lien on the property. Certain states use mortgages, while others use deeds of trust. (Find out which states typically use mortgages.)
There are two parties to a mortgage:
the mortgagor (the borrower) and
the mortgagee (the lender).
Mortgage transfers between banks are common. When a mortgage is transferred from one party to another, it should be documented and typically is recorded in the county records. The document used to transfer a mortgage from one mortgagee to another is called an assignment of mortgage. (To learn more about assignments, see What’s the difference between a mortgage assignment and an endorsement (transfer) of the note?)
The mortgage gives the mortgagee the right to sell the secured property through the foreclosure process if the mortgagor does not make the payments (or breaches the mortgage in another way). Judicial foreclosures (where the foreclosure must go through the state court system) are typical in states that have mortgages as the security instrument.
Deeds of Trust
A deed of trust, like a mortgage, pledges real property to secure a loan. It is used instead of a mortgage in certain states. (Find out which states typically use deeds of trust.)
Deed of Trust Terminology
A deed of trust involves three parties:
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 main function of a trustee is to sell the property at public auction if the trustor defaults on payments. Learn more about the duties of a foreclosure trustee.)
Deed of Trust Transfers
Like mortgages, when a deed of trust is transferred from one party to another, it should be documented and typically is recorded in the county records. The document used to transfer a deed of trust from one beneficiary to another is called an assignment of deed of trust. (Transfers of mortgages and deeds of trust are both commonly referred to simply as “assignments.”)
Deed of Trust Foreclosures
A nonjudicial foreclosure process is typically used in states that use deeds of trust. In a nonjudicial foreclosure, the lender can foreclose without going to court so long as the deed of trust contains a power of sale clause.
State law lays out the requirements for nonjudicial foreclosures.
Nonjudicial foreclosures tend to be much quicker than judicial foreclosures. (To learn more, see our articles Timeline for a Nonjudicial Foreclosure and Timeline for a Judicial Foreclosure.)
How to Determine if You Have a Mortgage or a Deed of Trust
The differences between a mortgage and a deed of trust affect homeowners only when foreclosure is an issue. 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 mortgage servicer (the company to whom you make your payments), or
go to your local land records office and pull up the recorded document. (Sometimes these records are available online.)