Are you trying to buy a home but having trouble getting a mortgage?
Some U.S. states are designated as "deed of trust states", which means that the document usually used as security for a real estate purchase is a deed of trust instead of a conventional mortgage.
This table sets out which states are mortgage only states, which are deed of trust only states, and which states allow both types of home loan financing arrangements. Each "deed of trust state" has its own laws governing the form and language of a deed of trust, and the foreclosure procedure.
How a conventional mortgage works
- Parties: Under a conventional mortgage, there are two parties to the loan agreement - the lender (the bank, mortgage company, etc.) and the borrower (the home buyer). The borrower signs a promissory note promising to pay back the loan and the interest by a certain date. The mortgage document describes the circumstances under which the borrower will be considered in default, which will trigger the lender's right to sell (foreclose on) the property.
- Who Holds Title: If you live in a "lien theory" state, you retain title to the property. If the property is situated in a "title theory" state, the lender will hold title to your home until the mortgage loan is paid.
- Foreclosure: The lender has a lien on the property and can foreclose on the loan if the borrower defaults on the promissory note. The foreclosure procedure must be done through the court and the lender has to file a lawsuit against the borrower. This is known as a "judicial foreclosure". All of this is costly and time-consuming.
How a deed of trust differs from a mortgage
- Parties: Under a deed of trust, there are three parties to the loan agreement - the lender, the borrower, and a trustee.
- Who Holds Title: Title to the property is placed with the trustee in trust for the lender until the loan is paid.
- Foreclosure: If the borrower fails to make the payments on time, the lender has a right of sale under a non-judicial foreclosure. There is no lawsuit and the courts are not involved. The trustee is responsible for notifying all interested parties about the foreclosure and for performing the sale. The whole process is faster and less costly for everyone.
What does this mean to you as a home buyer?
On the up side, a deed of trust might make it easier for you to get a loan to purchase your new home than trying to get a traditional mortgage from a bank. That's because you're basically giving over the title deed to the lender, as collateral security for the loan.
On the down side, with a deed of trust it's much easier for the lender to foreclose on you because you do not hold title to your property, and the trustee (who DOES hold the title) has the right to proceed with foreclosure without having to get the court's permission. The foreclosure process goes forward much faster, which gives you less time to remedy the default.
