If you are financing your home, you will either sign a mortgage or a deed of trust. Which of these you will be signing is almost entirely a function of what state you live in. Most people are more familiar with mortgages, but if you live in a state where deeds of trust are the norm, it’s essential that you understand the difference between the two. As a prologue to this, it is first necessary to talk about promissory notes.
Understanding Promissory Notes
Many people think of their mortgage or their deed of trust as being the instrument that obligates them to repay their loan. However, neither mortgages nor deeds of trust contain a promise of payment. Indeed, it is the promissory note that binds you to make payments. In other words, promissory notes are like glorified IOUs.
The roles of mortgages and deeds of trust are different. They are less concerned with the promises that you make now, and more concerned with the consequences of breaking those promises later down the line. Mortgages and deeds of trust hold your house in good faith so that if you don’t pay your IOU, you’ll lose your house.
What Is A Deed Of Trust?
To make this simple, a deed of trust does the same thing that a mortgage does, but differently. It’s unlikely that you’ll have much choice in which of these instruments is used. Whether you purchase a home with a mortgage or a deed of trust is essentially just a function of the state you live in. Most states use mortgages, but 19 states, including Tennessee use deeds of trust. So if you buy property in Nashville, there will be a deed of trust with your name on it.
The Similarities Between Mortgages & Deeds Of Trust
Mortgages and deeds of trust serve the exact same purpose and function: holding your home in good faith to make sure that you pay your debt. In both cases, the buyer will lose their home if they fail to make the payments they promised via their promissory note. However, the mechanics of how this works are quite different. We’ll explore these differences next.
The Differences Between Mortgages & Deeds Of Trust
1. What Happens When The Borrower Defaults (Foreclosures)
Mortgages: When a homebuyer is unable to make their payments, mortgages use what is called judicial foreclosure. This type of foreclosure must be carried out by the courts, and is often very time consuming. Because of this, judicial foreclosures provide the homebuyer with more of a safety net than the alternative.
Deeds of Trust: The details of how exactly this works vary state to state, but with foreclosures on homes that were purchased via deeds of trust, the courts will always be bypassed. This type of foreclosure is referred to as “non-judicial.” Free from the burden of obtaining court orders for every eviction, non-judicial foreclosures happen quickly, and do not provide homebuyers with the same safety net that judicial foreclosures do.
2. The Number Of Parties Involved
Mortgages: There are only two parties involved in the transaction. They are as follows
The borrower (you—the person buying property)
The lender (probably a bank)
Deeds of Trust: There are three parties involved in the transaction. They are as follows:
The borrower (you—the person buying the property)
The lender (probably a bank)
The trustee (often an escrow company)
It is the trustee that will be responsible for foreclosure proceedings in the event that the borrower cannot pay their debts.
Need A Real Estate Attorney In The Nashville Area?