Often, people refer to a home loan as a "mortgage," but a mortgage isn't actually a loan agreement. It's the promissory note that contains the promise to repay an amount borrowed to buy a home. A "mortgage" is a contract between you and the lender that creates a lien on the property. Some states use mortgages to create the lien, while others use deeds of trust or another similar-sounding instrument. The mortgage or deed of trust gives the lender the right to foreclose if you fail to make the monthly payments or breach the loan contract in some other way.
While mortgages and deeds of trust are similar because they're both agreements in which a borrower puts up the title to real estate as security (collateral) for a loan, these legal instruments do have some differences. For instance, mortgages and deeds of trust differ in the parties involved and, often, how the foreclosure process works.
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. With a mortgage, the two parties that enter into the contract 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 often 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 out-of-court 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. While a mortgage involves two parties, a deed of trust involves three:
The trustee is an independent third party that holds “bare” or “legal” title to the property. The trustee's primary function is to sell the property at a 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 usually is recorded in the county records. Transfers of mortgages and deeds of trust are both referred to as "assignments."
Nonjudicial foreclosures are typical 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.
Nonjudicial foreclosures tend to be much quicker than judicial 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.