A house loan is sometimes referred to as a “mortgage,” however, in reality, a mortgage is not a loan arrangement. It’s a promissory note that guarantees repayment of a loan used to purchase a house. A “mortgage” is a legal agreement between you and the lender that establishes a lien on the property. Mortgages are used in certain states, whereas deeds of trust or similar-sounding forms are used in others. If you don’t make your monthly payments or break the loan contract in any other fashion, the lender has the authority to foreclose on your home.
While mortgages and deeds of trust are similar, they require a borrower to put up the title to real estate as security (collateral) for a loan; there are notable variations between the two legal instruments. Mortgages and deeds of trust, for example, differ in the parties involved and, in many cases, how the foreclosure process works.
What Is a Mortgage?
When you took out a loan to buy your house, you most likely signed a mortgage or a deed of trust, depending on where you reside. The following are the two parties who sign into a mortgage contract:
- the mortgagor (the borrower) and
- the mortgagee (the lender)
Mortgage transfers are common between banks and other businesses. A mortgage is documented and usually recorded in the county records when transferred from one party to another. An “assignment of mortgage” is a document used to transfer a mortgage from one entity to another.
If the mortgagor fails to make payments or otherwise breaks the loan contract, the loan owner has the right to sell the secured property through the foreclosure procedure.
In places where mortgages serve as the security instrument, judicial foreclosures, which must be handled through the state court system, are common. Foreclosures are usually nonjudicial in a few states that use mortgages, such as Alabama and Michigan. The conditions of the mortgage contracts and state legislation allow lenders to undertake out-of-court mortgage foreclosures in these states.
What Is a Deed of Trust?
A deed of trust, like a mortgage, secures a loan by pledging real property. In certain states, this document is used instead of a mortgage. While a mortgage involves two parties, a deed of trust involves three:
- The trustee,
- the trustor (the borrower), and
- the lender (sometimes known as a “beneficiary”).
The trustee is a neutral third party who retains the property’s “bare” or “legal” title. If the trustor defaults on payments, the trustee’s principal responsibility is to sell the property at a public auction.
Deed of Trust Transfers
When a deed of trust is transferred from one party to another, an assignment is frequently documented in the county records, much like mortgages. Mortgage transfers and deeds of trust are both referred to as “assignments.”
Deed of Trust Foreclosures
In states that use deeds of trust, nonjudicial foreclosures are common. If the deed of trust has a power of sale clause, the lender can foreclose without court. The procedural criteria for nonjudicial foreclosures are outlined in state law. Unlike judicial foreclosures, nonjudicial foreclosures are usually completed significantly faster.
How to Determine if You Have a Mortgage or a Deed of Trust
You may find out if your house loan was secured by a mortgage or a deed of trust by:
- Checking the documentation you got when you completed escrow on your home
- Calling your loan servicer or
- Visiting your local land records office to obtain the registered document. These records are sometimes available online.