When it comes to real estate financing, two common terms that often come up are “deed of trust” and “mortgage.” While both are used to secure loans for the purchase of property, they differ in several key areas. Understanding these differences is crucial for both borrowers and lenders. In this article, we will explore the ways in which a deed of trust differs from a mortgage.
Legal structure: One of the primary differences between a deed of trust and a mortgage lies in their legal structure. In a mortgage, there are two parties involved: the borrower (mortgagor) and the lender (mortgagee). The borrower retains legal title to the property while granting the lender a lien on the property as security for the loan. On the other hand, a deed of trust involves three parties: the borrower, the lender, and a third-party trustee. The borrower conveys legal title to the trustee, who holds it as security for the loan. This trustee has the power to initiate foreclosure proceedings in the event of default.
Foreclosure process: Another significant difference between a deed of trust and a mortgage is the foreclosure process. In a mortgage, if the borrower defaults on the loan, the lender must go through a judicial foreclosure process. This means that the lender must file a lawsuit and obtain a court order to foreclose on the property. In contrast, a deed of trust allows for non-judicial foreclosure. The trustee, acting on behalf of the lender, can initiate foreclosure proceedings without involving the court system. This streamlined process can save time and money for both parties involved.
Notice requirements: In a mortgage, the lender is typically required to provide the borrower with notice of default and an opportunity to cure the default before initiating foreclosure proceedings. The specific notice requirements vary depending on the jurisdiction. However, in a deed of trust, the notice requirements are often more flexible. The trustee is generally only required to provide notice to the borrower and other interested parties before initiating foreclosure. This streamlined notice process can expedite the foreclosure process.
Power of Sale
Power of sale: A key difference between a deed of trust and a mortgage is the power of sale provision. In a deed of trust, the borrower grants the trustee the power to sell the property in the event of default. This power of sale allows the trustee to sell the property at a public auction without court involvement. The proceeds from the sale are then used to satisfy the outstanding debt. In contrast, a mortgage does not typically include a power of sale provision. Instead, the lender must go through the judicial foreclosure process mentioned earlier.
In summary, a deed of trust differs from a mortgage in several significant areas. The legal structure, foreclosure process, notice requirements, and power of sale provisions all set these two financing instruments apart. Understanding these differences is crucial for both borrowers and lenders when entering into a real estate transaction.
– Cornell Law School. (n.d.). Mortgages and Deeds of Trust. Legal Information Institute. Retrieved from: law.cornell.edu
– Investopedia. (2021). Deed of Trust vs. Mortgage: What’s the Difference? Retrieved from: investopedia.com