THE DIFFERENCE BETWEEN A MORTGAGE AND A DEED OF
When a borrower signs a promissory note, he is agreeing to pay the lender a specific amount of money according to certain conditions. In order for the lender to protect his interests, he will require that the borrower sign a mortgage or similar security instrument in favor of the lender. This may be in the form of a mortgage or a deed of trust. Whichever document is used, the purpose of both types of documents is to secure the note and offer protection to the lender. Your investment is secured by a deed of trust recorded against the title of the borrower’s property. Unlike deposits in a bank or savings and loan, which are generally insured by a federal agency (such as FDIC) and may usually be withdrawn with limited notice, the promissory note: (1) involves some risk to principal (a typical feature of all investments); (2) establishes a specific and predetermined period of time for the repayment of your investment; and (3) does not benefit from insurance issued by a federal agency. In a deed of trust, the borrower (trustor) transfers the Property, in trust, to an independent third party (trustee) who holds conditional title on behalf of the lender or note holder (beneficiary) for the purpose of exercising the following powers: (1) to convey the deed of trust once the borrower satisfies all obligations under the promissory note; or (2) to sell the Property if the borrower defaults (known as a foreclosure). Foreclosure involves the process of selling the Property to a third-party bidder or, in the absence of a sufficient third-party bid, acquiring title to the Property. The foreclosure sale, in most cases, satisfies the debt. Depending upon the method of foreclosure, the nature of the loan, the circumstances of origination, and the value of the Property, you may or may not be able to recover your entire investment. For example, if a third party bids at a non-judicial foreclosure sale an amount equal to or greater than the amount you are owed (including fees, costs, and expenses of the foreclosure), your investment would be fully paid. On the other hand, if you bid the full amount that is owed to you, including all foreclosure fees, costs, and expenses (full credit bid) and there are no third-party bids, you will generally be limited to the property and its value as the source of repayment of your investment. If the property’s value is insufficient to recover all you are owed, a judicial action for a deficiency judgment may be the only way to recover your investment; i.e., collect any difference between the amount received at the foreclosure sale and the amount of money the borrower owes you. Depending on where the property is located, state law will determine which type of security instrument must be used. In title theory states, a mortgage is used and it conveys ownership to the lender. A clause in the mortgage provides that title reverts back to the borrower when the loan is paid. In lien theory states, the mortgage creates a lien only on the property and the title remains with the borrower. The lien is removed when all the payments have been made.Some states are considered modified lien theory states and in these states the title remains with the borrower, but the lender may take title to the property if the borrower defaults. The basic difference between the mortgage as a security instrument and a Deed ofTrust is that in a Deed of Trust there are three parties involved, the borrower, the lender, and a trustee, whereas in a mortgage document there are only two parties involved, the borrower and the lender. In a Deed of Trust, the borrower conveys title to a trustee who will hold title to the property for the benefit of the lender. The title remains in trust until the loan is paid. Often a title company, escrow company or bank, is listed as the trustee on the Deed of Trust. When the loan has been paid, the trustee will issue a release deed or trustee's conveyance deed. This deed of conveyance should be recorded at the county recorder's office, to make public notice that the loan has been paid and that the lender's interest in the property has ended. Another difference between a mortgage and a deed of trust is the manner in which foreclosure proceedings take place. State law will determine the method of foreclosure which must be used. Generally, the rules when using a Deed of Trust allow for a faster foreclosure time than with a judicial foreclosure required with a mortgage. Under a Deed of Trust, when the borrower defaults on the loan, the lender delivers the Deed of Trust to the trustee, who then is instructed to sell the property. After proper notices have been posted and rules are followed, the property is sold at a trustee's sale and the loan is paid. Be careful not to confuse a deed, which conveys title and is evidence of ownership to property, with a Deed of Trust, which is a means of securing a note and providing for foreclosure proceedings.
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