What is the Difference Between a Deed of Trust and a Mortgage?

While both a deed of trust and a mortgage are viable ways of going about the task of financing the purchase or real estate, there are a few key differences between these approaches. For the most part, those differences have to do with who is actually involved in the establishment of the agreement, and what can happen if the buyer ultimately chooses to default on the contract and the property is foreclosed. For this reason, understanding the difference between a deed of trust and a mortgage is important to anyone thinking about purchasing a home or some sort of commercial property.

One of the most apparent differences between a deed of trust and a mortgage is that the mortgage establishes a covenant between a lender and a borrower. The terms of the contract include the amount of the loan, the collateral used to secure the mortgage, the rate of interest and how it is applied to the loan balance, and how the monthly installment payments are calculated. A mortgage contract also stipulates the rights and responsibilities of both parties, and outlines processes that may be invoked should one party or the other fail to abide by those covenants.

With a deed of trust, a third party is added to the business relationship. Along with the borrower and the lender, a title insurance company is also included in the process. The title company actually retains the legal title to the property in question until the loan is paid in full. This arrangement typically causes no real issues for the buyer, as long as the payments are made on time and the loan is retired according to terms.

A major difference between a deed of trust and a mortgage comes to light when the borrower is no longer submitting timely payments on the outstanding debt. Typically, the title company holding the trust deed can move very quickly to declare the loan in default and begin foreclosure proceedings. In many nations, there are fewer legal steps that the title company must be taken before seizing control of the property. In contrast, the mortgage lender will have other steps that must be observed before foreclosure can begin. Depending on the laws regarding the sale of property within a given country, that process may mean lenders must put off foreclosure until the borrower is several months behind, whereas the title company in a deed of trust arrangement can move when the borrower is no more than a couple of months in arrears.

The difference between a deed of trust and a mortgage is also apparent when it comes to other breaches of the agreement that could lead the title company or the lender to attempt to foreclose on the property. As an example, if the homeowner fails to maintain insurance on the property or does not maintain the property in accordance with the loan terms, a mortgage lender may seize control of the property, but only after obtaining a court order and then going through what may be a costly legal process. When a trust deed is involved, rather than a standard mortgage, the process of foreclosure is often less complicated and can move at a much faster pace.