People tend to confuse the deed of trust and mortgage. The documents are very similar. 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 foreclosure if you fail to make the monthly payments.
Both have similarities and differences that real estate attorney Jeff Baxter says it is important for you as prospective owner to be aware of before buying property in any city.
In general, both the mortgage and the deed of trust achieve the same thing. They sign the property over to you and specify the terms and details of repayment. The form revolves around when the borrower will repay the loan to the lender and all particular conditions that are involved in that. They also give the lender recourse to sell the property if the borrower defaults.
Both the mortgage and the deed of trust are executed in the city/ state where the buyer resides. The buyer (or lender) holds the Trust until the borrower has repaid his loan after which time, the property belongs to the borrower and he as duly acquires this promissory note. In other words, the IOU is cancelled since the borrower has fulfilled its terms.
These are the similarities between a mortgage and a deed of trust.
Differences between a mortgage and a deed of trust
Small differences exist too.
The mortgage usually has only two parties: the borrower and the lender. Conversely, the deed of trust has three parties: borrower, lender and Trustee who holds title to the lien for the lender. The trustee works for the lender. He is the one to open and close the proceedings and drive the process through possible trouble (i.e. ensuring repayment and starting the judicial process) if such turmoil exists. The Trustee is the ‘peacemaker’. The person who holds the position is usually a a title company, escrow company or attorney. California’s Bureau of Real Estate (CalBRE) advises that before you hire a trustee make sure to do three things:
- Call the California’s Bureau of Real Estate (CalBRE) to see if he or she is properly licensed, review the length of the license and see whether the Trustee (or mortgage broker) has been disciplined for any reason. You may also want to check the local Better Business Bureau to ask if any complaints have been lodged.
- Check to see whether the Trustee is related to the lender in any form or manner. This is called self-dealing and may harm the transaction.
- Ask the Trustee to provide a professional profile. He should also tell you the approximate number and percentage of loans that he negotiated which resulted in foreclosure during the past few years.
The biggest difference between the deed of trust and mortgage is what happens after a default.
In the case of a mortgage the system goes through a long and costly process. The lender has to file a lawsuit, obtain a judgment approving the foreclosure, wait for the sheriff’s sale to sell the property, wait out any redemption period the owner may have. Needles to say, it is one of the reasons why lenders are less eager to rush into transactions with merely any borrower. The credit history and performance of borrower has to be immaculate. Few lenders may even as much consider entering such a risk.
The Deed of Trust, however, allows the lender to close it either in or out of court. This is less stressful and far cheaper. It also shortens the time of dispute thereby allowing him to faster collect on his money.
Here’s the way Jeff Baxter explains how he does it:
following a default under the Deed of Trust, the lender can initiate the foreclosure by recording a Notice of Trustee’s Sale, waiting the statutorily required period (at least 90 days) and then proceed to sell the property at a Trustee’s sale. This is a broad simplification, and the lender must follow the statutory scheme in order to validly sell the property,
As Baxter notes; “It is much simpler than a judicial foreclosure. Also, unlike following a judicial foreclosure, there is no right of redemption. There is, however, a right of reinstatement prior to the Trustee’s sale to bring the loan current and reinstate the Deed of Trust. “
In short, if you’re drawing up a document that notes details of a property and related conditions of repayment, you have two recourses: the mortgage or the deed of trust.
Most investors prefer the deed of trust since it is shorter and far less expensive than a judicial foreclosure which the mortgage may incur.