July 29th, 2022
July 29th, 2022
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4.5 - 1 vote
Most people are familiar with the concept of getting a loan during the process of buying a home, using the purchased home to act as security for the loan of the money used to purchase it. However, depending on the state and the preferences of the lender, a deed of trust or a mortgage deed may be used. Although these two documents both serve the same purpose of securing a loan by placing a lien on a property, there are major differences between the two documents and how they function. This guide will examine the deed of trust and the mortgage deed, explaining how each document works and the similarities and differences between them.
A Mortgage Deed is a legally binding document outlining the terms of a mortgage that puts a lien on a property until the lender repays the loan in full. The mortgage deed gives the lender a secured interest in the property that they loaned the money to the borrower for, protecting them in the event that the borrower fails to pay back the loan. If the borrower defaults on the loan, the mortgage deed grants the lender the legal right to foreclose or take ownership of the real estate, usually following litigation in court.
A mortgage deed allows the lender to hold the borrower's house as collateral until they repay their loan. In a real estate transaction, the lender -- often a bank -- and the property buyer will agree on the terms of the mortgage loan, including the size of the home loan, the deadline for paying it off, the interest rate on the money that has yet to be paid, and the schedule on which the borrower will repay the loan. The deed states that if the borrower breaks the terms of the mortgage loan, the lender has the right to claim ownership of the property and sell it to recuperate any financial losses from the loan.
Mortgage deeds are filed with the county where the property is and can be viewed at a public registry office. A mortgage deed can come to a close either through the borrower paying off the loan or if the borrower defaults on the loan. When a borrower pays off the loan, the lender files a document called a "satisfaction of mortgage" which states that the lender no longer holds interest in the property. If the borrower defaults on the loan agreement, the lender can take possession of the legal title of the property. They may then auction it off or foreclose on the property.
A Deed of Trust is a method of securing a real estate purchase that involves three major parties: the lender who is lending the money to make the purchase, the borrower who is borrowing the money from the lender, and a third-party trustee. The lender gives the borrower the money to purchase the home in exchange for a secured promissory note outlining the terms under which the borrower will repay the loan to the lender. The trustee holds the legal title to the property until either the loan is paid off, at which point the title is transferred to the borrower, or the borrower fails to repay the loan, at which point the trustee sells the property and uses the proceeds to repay the lender.
The deed of trust involves a trustor, a beneficiary, and a trustee. The purpose of the trust is that it sets up a remedy for the lender so that, under conditions defined in the trust, the trustee can sell the property, take it back, or compel an accelerated repayment of the loan in order to protect their investment. Essentially, the trust works as security for the promissory note -- the borrower's promise to repay the loan.
The trustor is the party whose assets are being put into the trust. In the case of a real estate transaction, this would be the borrower. The official legal title of their property is put in the trust. While the legal title defines who owns the property and is held in the trust, as long as the borrower continues to meet the terms and conditions of the trust, the borrower still holds what is known as the equitable title. Having equitable title means that the trustor can enjoy the benefits of property ownership, such as residing at the property, regardless of who technically has legal ownership of the property at that point in time. The trustor can live in the property and accumulate equity in the property as they make payments on the loan and the value of the property increases.
The beneficiary of the deed of trust in a real estate transaction is the party whose investment interest is being protected. Generally speaking, this is usually the lender. However, this could also be a person who has a land contract with a borrower to eventually own the property outright. In exchange for lending the money to the borrower to purchase the property, the deed of trust serves as the lender's guarantee that the borrower will repay the loan.
The role of the trustee is to act as the third party who holds the legal title while the borrower makes payments to the lender. The trustee is meant to be impartial and not do anything that unduly benefits or punishes either the trustor or the beneficiary. If the trustor decides to sell the property at some point before they have finished repaying the loan to the beneficiary, the trustee must pay the lender the proceeds of the sale that cover the remaining amount due on the loan, with the remainder of the proceeds going to the trustor who is selling the property. If the loan is fully paid off by or before the end of the term set out in the promissory note, the trustee is the one who is in charge of dissolving the trust and transferring legal title to the property back to the trustor. If the trustor defaults on the terms of the trust, for example by not making payments to the lender as required, the trustee must sell the property and give the proceeds to the beneficiary to help the beneficiary protect their investment and recoup the money they lent.
Though mortgage deeds and deeds of trust operate differently, they serve the same purpose and normally have the same general provisions or clauses. Most mortgage deeds and deeds of trust require the borrower to, among other things:
Mortgage deeds and deeds of trust also usually require the lender to give the borrower a written notice, known as a breach letter, before starting the foreclosure process. Lenders also typically have to provide the borrower with a specific amount of time to avoid foreclosure by getting current on their loan.
In some states, such as Wisconsin and Florida, lenders use mortgage deeds to create security interests in properties. In other states, like California and Colorado, lenders use deeds of trust or similarly named documents. In Georgia the most commonly used contract that gives a lender a security interest in a property is called a security deed. However, no matter the name or the specifics of how these contracts operate, they are all meant to protect the lender's investment by creating a security interest in the borrower's property.
Although mortgage deeds and deeds of trust accomplish the same goal -- to make a borrower's home a source of repayment if they default on their loan -- they differ in three major respects.
A mortgage deed is an agreement between a borrower and a lender that allows the lender to effectively hold the title in the borrower's property. In a deed of trust, a third-party trustee acts on behalf of the lender to ensure that the borrower follows the terms of the repayment agreement. Under the terms of a deed of trust, the trustee may hold the title to a borrower's home in escrow until the loan is paid off. The trustee may be an escrow agent or an employee of a title company.
A mortgage involves two parties: a "mortgagor" (the borrower) and a "mortgagee" (the lender). A deed of trust, however, has three parties: a "trustor" (the borrower), a "beneficiary" (the lender), and the "trustee" (an impartial third party). The trustee obtains legal title to the secured property when the loan is taken out and holds it until the borrower pays the debt in full. Depending on the state, the trustee may be an individual, such as an attorney, or a business, such as a bank or a title company.
If the Borrower does not make their loan payments or otherwise breaches the terms of the mortgage deed or deed of trust, the lender will foreclose on the property. The mechanics of foreclosing a mortgage deed or deed of trust depend on state law and the terms of the agreement. Generally, in states where lenders use mortgage deeds, the lender forecloses by filing a lawsuit against the borrower in court. This process is known as a "judicial foreclosure." If the lender wins the lawsuit, they get a judgment that allows them to sell the property and use the proceeds to repay the loan. Judicial foreclosures can be a long and arduous process, usually taking at least several months but sometimes as long as a few years to complete.
In states where lenders use deeds of trust that contain a power of sale clause, the lender can foreclose out of court in a process known as a "nonjudicial foreclosure." In this situation, the trustee's main function is to manage the foreclosure process and sell the property at a public auction if the borrower defaults on the deed of trust. State law typically requires the trustee to act impartially during the foreclosure. A nonjudicial foreclosure usually involves:
Nonjudicial foreclosures are typically a much more speedy and straightforward process than judicial foreclosures, usually taking a few months or less from start to finish.
Mortgage deeds and deeds of trust are both important tools used to facilitate the loan process, allowing the borrower to have access to funds that they might not otherwise be able to obtain and giving the lender peace of mind that their investment will be protected.
About the Author: Malissa Durham is a Legal Templates Programmer and Attorney at Wonder.Legal and is based in the U.S.A.