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. In this article, you'll learn the difference between these two documents and how they relate to the foreclosure process.
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're signing with the lender to borrow money to purchase a house. But it's the promissory note that contains the promise to repay the amount borrowed.
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 isn't actually a loan. A "mortgage" is a contract between you and the lender that creates a lien on the property. Some states use mortgages, while others use deeds of trust.
The two parties to a mortgage are:
Mortgage transfers between banks and other entities are common. When a mortgage is transferred from one party to another, it's documented and is typically recorded in the county records. The document used to transfer a mortgage from one entity to another is called an "assignment of mortgage."
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 nonjudicial foreclosures of mortgages.
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.
A deed of trust involves three parties:
The trustee is an independent third party that holds “bare” or “legal” title to the property. The trustee's main function is to sell the property at public auction if the trustor defaults on payments.
Like mortgages, when a deed of trust is transferred from one party to another, an assignment is typically is recorded in the county records. Transfers of mortgages and deeds of trust are both commonly referred to as "assignments."
Nonjudicial foreclosures are common 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.
To find out whether a mortgage or deed of trust was used to secure your home loan, you can:
To learn which foreclosure process is usually used in your state, check our Key Aspects of State Foreclosure Law: 50-State Chart or talk to a local attorney.