People often refer to a home loan as a "mortgage." But a mortgage isn't actually a loan agreement. The promissory note contains the promise to repay the amount you 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 typically 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 payments or violate 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 collateral for a loan, these legal instruments have differences. They differ in the parties involved and how the foreclosure process usually works.
A "mortgage" is a legal contract in which you agree to put up real estate as security (collateral) for a loan. Depending on where you live, you likely either signed a mortgage or a deed of trust, which is similar to a mortgage, when you took out a loan to buy your home.
With a mortgage, the two parties to the contract are:
A deed of trust, on the other hand, involves three parties: the lender, borrower, and a neutral third party called a "trustee" (for more on deeds of trust, see below).
Mortgage transfers between banks and other entities are common. When a mortgage loan is sold from one party to another, this transfer is documented and typically recorded in the county records.
The document that transfers a mortgage from one entity to another is called an "assignment of mortgage." Usually, each assignment is recorded in the county land records.
The mortgage gives the loan owner the right to sell the secured property through the foreclosure process if the mortgagor doesn't make the payments or breaches the loan contract in another way.
Judicial foreclosures, which go through the state court system, are typical in states that use mortgages as security instruments. However, in a few states that use mortgages, like Alabama and Michigan, foreclosures are ordinarily nonjudicial. In these states, the mortgage contracts' terms and state laws allow lenders to conduct out-of-court foreclosures of mortgages.
A deed of trust pledges real property to secure a loan. This document is normally used instead of a mortgage in some states. Again, while a mortgage involves two parties, a deed of trust involves three:
The trustee is an independent third party, like a title company, trustee company, or bank. The trustee holds "bare" or "legal" title to the property. The trustee holds the property's title in trust, with the power of sale.
The borrower gets equitable title and the use of and responsibility for the property. When the borrower pays the debt in full, they get the property's legal title. But if the borrower defaults on payments, the trustee will handle the foreclosure process and sell the property at a public auction.
Like mortgages, when a deed of trust is transferred from one party to another, an assignment is usually recorded in the county records.
Transfers of mortgages and deeds of trust are both called "assignments." An "assignment" transfers the seller's interest under the mortgage or deed of trust to the new owner.
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. Although, the lender might decide to foreclose judicially, even if a nonjudicial foreclosure process is available.
State law lays out the procedural requirements for nonjudicial foreclosures. Nonjudicial foreclosures tend to be much quicker than judicial foreclosures.
From a borrower's perspective, it might be better to have a mortgage if you default on your home loan. Again, judicial foreclosures typically take much longer than nonjudicial ones. Assuming you live in a judicial foreclosure state, you'll get more time to live in the home payment-free while the foreclosure works its way through the court.
Also, if your state requires a judicial foreclosure process, it's easier (and less expensive) to jump into the existing lawsuit if you want to fight the foreclosure. If, however, foreclosures proceed without court supervision (nonjudicial foreclosures), then you'll have to bring your own lawsuit—a more involved and costly process.
But in some states, the lender is prohibited from seeking a deficiency judgment if the lender forecloses a deed of trust nonjudicially.
From a lender's perspective, a deed of trust is usually better because it can foreclose more quickly using a nonjudicial process if the borrower stops making payments. But you don't get to choose whether you get to sign a mortgage or deed of trust. The real estate industry in your state, and the laws that industry's lobbyists have pushed through that state's legislature, pretty much determine whether mortgages or deeds of trust are used where you live.
A few states let lenders use both trust deeds and mortgages. Still, even in these states, your lender will choose which document you'll have to sign. The decision isn't up to you.
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.