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Deed of Trust vs Mortgage: The Basics You Need to Know

Monday, February 15, 2021

The median home price in the U.S. is roughly $320,000. When it's time for you to buy your new home, chances are, you don't have access to that much cash. That's why mortgages and home lending is a $10 trillion industry.

When you need to borrow to pay for your next home, you have plenty of options. Choosing the right one can be tricky. One decision you may have to make is how to borrow. It is the question of a deed of trust vs mortgage.

This short guide will help you to understand the similarities and differences between these borrowing options and which one may be right for you.

What is a Deed of Trust?

While mortgages are fairly widely understood, many people have never even heard of a deed of trust. From the perspective of the borrower, these two lending scenarios aren't that different.

A deed of trust, like a mortgage, is a lending relationship used for a property purchase, typically home purchases. A deed of trust involves a third-party trustee relied on to hold the title and title responsibilities.

Some states require a deed of trust, others require a mortgage, and still, others allow for either method. In those states where you have the option, it is common to see smaller lenders opt for a deed of trust over a mortgage.

As the borrower and eventual homeowner, you do have the right to seek out the option of your choosing.

What's the difference?

The biggest difference between a deed of trust and a mortgage is the people involved. In a mortgage lending relationship, there are two parties: lender and borrower.

The lender not only puts up the money for a purchase, but they also hold the title to the property being purchased and all of the responsibilities associated with that. In a deed of trust lending relationship, there are three parties involved.

Lender or Beneficiary

As in a mortgage, the lender is the one who gives the funding for your property purchase. As the borrower, you are responsible for paying off this loan and the interest associated. Again it is the lender that you have to reimburse.

As far as the financing goes, there is little difference between a mortgage and a deed of trust. 

Borrower or Trustor

Again, this is you. You will borrow the money from the lender to purchase the home. You are then responsible for paying the lender back over the term of your loan. As the borrower, you still face the same potential penalty for defaulting on your payments.

The only time you may notice the difference between these two options is when the title needs to change hands because you sell your house, pay off your house, or get foreclosed on.

Trustee

The trustee in this relationship holds the title to the purchased property. The role of the trustee is to take many of those responsibilities away from the lending institution.

If you, as the borrower, default on your loan it is the trustee's job to begin the foreclosure process. One difference of note is that in a deed of trust situation, banks can bypass the judicial foreclosure process making it a much quicker turnaround.

Trustees are also tasked with handling final payments to the lender in the case of a sale prior to the loan being paid off. When you do pay off the loan, it is the trustee's job to handle the transfer of the title over to you and dissolve the trust.

In essence, the Trustee handles much of the title-related proceeding for the lender in the case that they are unequipped to do so. As such, many lenders reserve the right to appoint a trustee on their own.

If your lender offers to jointly appoint a trustee, you get some say in who this is. Your trustee should be an unbiased party. They are typically one of the following:

  • Attorney
  • Title insurance company
  • A national bank
  • An agency of the U.S. government

Take the opportunity to give input into the appointment of your trustee. Do your research and find a trustee that has a track record for smooth and unbiased dealings.

Deed of Trust vs Mortgage: Which is Best?

For many, the question itself is a moot point. Depending on where you live, your state may require either a mortgage or a deed of trust. Though there are 15 states that give you the option to choose one or the other.

As the borrower, you may see very little difference between these options. In both cases you can access the funds to purchase your home, you'll make regular payments on the loan until it is paid off, and you'll risk foreclosure penalties if you default.

If you are planning to use a big bank or lender, there is a good chance, they'll be comfortable with a mortgage. If you plan to use a smaller or less traditional lender, they may be more likely to include a third-party trustee for their benefit.

Protect Yourself

Deed of trust vs mortgage borrowing is one of many questions you'll have to consider when you buy your home.

Either way, you should consider title insurance to keep you protected from any of dozens of potential issues related to purchasing your home. Protecting your rights against either a mortgage or trustee lienholder is an important step.

Visit our site before you buy your next home for tips on how to build the best team to make your real estate adventure a smooth and headache-free experience.

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