Understanding Deed of Trust vs Mortgages and State Differences

When you’re looking to buy a home, you’ll likely come across terms like “mortgage,” “deed of trust,” “land contract,” “real estate contract,” and even “bond for deed.” It might feel like you’re learning a new language altogether, but there’s no need for alarm.

A “mortgage” is a banking term and it basically means a loan from a bank or lender to help you purchase a house. What about a “deed of trust” and those other terms we mentioned earlier?

They are all ways to buy or secure a home, but they work differently depending on where you live. Each state in the U.S. has its own rules about buying homes and securing loans, which is why it’s important to know the differences.

Deed of Trust vs Mortgages

Before we dive into the specifics of each term, let’s start with the basics. Knowing what each of these terms means will help you understand how they impact your journey to homeownership.

Definitions: Deed of Trust vs. Mortgage

A mortgage is a loan agreement between you and a lender. When you take out a mortgage, the lender gives you the money you need to buy your home. In return, you agree to pay back the loan over time, usually with interest. The house itself serves as “collateral.” This means if you can’t or won’t make your payments, the lender or bank may take your home to recover their investment back from you through a foreclosure action (more on this below).

A deed of trust is similar to a mortgage but involves three parties: the borrower or buyer of the property, the lender or bank, and a third party called a “trustee.” The trustee holds the title to your home as security for the loan. If you pay off your loan as agreed, you keep your home. If not, the trustee can sell your home to pay off the loan.

What’s the Difference Between a Mortgage and a Deed of Trust?

Both mortgages and deeds of trust are ways to secure a loan for buying a home. They both involve borrowing money and using your home as security or collateral. However, the process for what happens if you can’t pay back the loan is different.

The main difference between a mortgage and a deed of trust lies in the methods through which a lender can recoup the loan should the borrower fail to repay in full.

Where a borrower has secured a loan via a mortgage and subsequently encounters difficulties in repayment, the lender is required to initiate a judicial foreclosure process. This necessitates engaging with the court system to undertake foreclosure actions against the borrower’s property. Termed as judicial foreclosure, this procedure is notably protracted and complex, largely because standard mortgage agreements lack a “power of sale” clause. Without this clause, lenders do not have the prerogative to expedite foreclosure proceedings outside of court intervention.

Conversely, a deed of trust incorporates a “power of sale” clause. This significant clause grants a trustee the authority to proceed with selling the property without necessitating court involvement, in the event of the borrower’s failure to meet payment obligations. This facilitates a non-judicial foreclosure process, which is characteristically more swift and less cumbersome than its judicial counterpart.

What Are Mortgage States?

In mortgage states, the loan agreement between the borrower and the lender is secured by a mortgage. If the borrower fails to make payments, the lender must go through a judicial foreclosure process to recover the rest of the loan. This means the lender must file a lawsuit in court to foreclose on the property. The process can be lengthy and costly, providing a layer of protection for the homeowner but also prolonging the uncertainty.

Examples of mortgage states in the US include New York, Florida, and Illinois.

What Are Deed of Trust States?

Deed of trust states standardize the security of home loans by deeds of trust. This implies that if a borrower defaults on their loan, the trustee can sell the property without going through the court system. Some deed of trust states in the US are California, Texas, and Virginia.

States Allowing Both Security Instruments

Some states allow both mortgages and deeds of trust as methods for securing a home loan. In states where both options are viable, lenders are afforded the flexibility to choose between utilizing a mortgage or a deed of trust. This decision can be influenced by the lender’s preference or the unique circumstances surrounding the loan.

Examples of these states are Alabama and Colorado.

Key Differences between a deed of trust and a mortgage

The main difference between a mortgage and a deed of trust is how the loan recovery process is handled during a foreclosure action and what happens if you can’t pay it back.

A mortgage involves just you and the lender going through the court system, while a deed of trust adds a third party into the mix in order to streamline the process.. Also, the foreclosure action can be quicker within a deed of trust state because it doesn’t always require court action.

Additional Terms to Know

As we explore the world of home buying, there are a few more terms you may come across:

• Land Contract: A land contract is an agreement between you and the seller where you pay for the home in installments directly to the seller instead of borrowing from a lender. You only get the title to the home after you’ve paid in full.
• Real Estate Contract: Similar to a land contract, a real estate contract is an agreement to buy property through installment payments. The specifics can vary, but generally, the seller retains legal title until the buyer pays off the contract.
• Bond for Deed: This is a type of real estate transaction where the seller retains title to the property until the buyer completes all payments according to the bond agreement.

State-by-State Guide

To help you navigate the differences between mortgage states, deed of trust states, land contract states, real estate contract states, and bond for deed states, we’ve compiled a comprehensive table.

This table outlines which financial instruments are preferred or available in each state. So, wherever you live, you’ll have a clear overview of what your options are..

Land Contract States, Real Estate Contract States, and Bond for Deed States

• Land Contract States: These states allow buyers and sellers to enter into land contracts. They include Ohio and Indiana. .
• Real Estate Contract States: Similar to land contract states, these states permit installment-based purchase agreements. For now, real estate contracts are available in only New Mexico. .
• Bond for Deed States: In these states, a bond for deed arrangement can be used. Louisiana is a bond for deed state..

The Redemption Period After Foreclosure

The redemption period allows individuals the chance to reclaim ownership of their property by settling the total debt owed, including any ancillary expenses accrued throughout the foreclosure process. The presence and extent of this redemption period can vary across different jurisdictions within the United States.

For instance, in states such as Alabama, Alaska, and Arkansas, the law extends a redemption period of up to one year following the foreclosure sale.

On the flip side, some states aren’t as lenient. They might give you a much shorter time to redeem your property, or they might not offer this period at all. For example, places like Colorado and Georgia, which tend to go the non-judicial route for foreclosures, often skip the redemption period. This means once your home has gone through foreclosure, moving on happens a lot quicker, and for those who’ve lost their homes, it’s a tough pill to swallow, leaving them at a significant disadvantage.

Here’s a table that summarizes the redemption periods after foreclosure in different states in the US.

Home buying options FAQs

What is the main difference between a mortgage and a deed of trust?

The main difference between a mortgage and a deed of trust lies in the parties involved and the foreclosure process. A mortgage involves two parties: the borrower and the lender, and if foreclosure is necessary, it typically requires a court proceeding, known as judicial foreclosure. A deed of trust involves an additional party, the trustee, who holds the legal title to the property until the loan is paid off. In case of default, the trustee can initiate a non-judicial foreclosure, which is usually faster and doesn’t require court intervention.

How does a land contract differ from a traditional mortgage?

Unlike a traditional mortgage, the buyer does not receive the legal title or borrow money from a lender initially. The seller in a land contract holds the legal title to the property while the buyer has an equitable interest in the property until they make the last payment. This arrangement is more flexible but also poses risks since the buyer doesn’t own the property until the final payment is made.

Can you explain what a real estate contract is?

A real estate contract, similar to a land contract, is an agreement where the buyer agrees to pay the seller for the property in installments. The key difference often lies in the terms and conditions specified in the contract, which can vary widely. Like a land contract, the legal title remains with the seller until the buyer completes all payments, offering an alternative financing route to traditional loans but with certain risks and benefits depending on the contract’s specifics.

What is a bond for deed, and how does it work?

A bond for deed is a type of real estate transaction where the seller retains the title to the property until the buyer completes all payments according to the agreement. It’s similar to a land contract but is typically used in specific regions or under certain conditions. This arrangement allows buyers to make payments directly to the seller without obtaining a traditional mortgage, but it also means the buyer doesn’t gain full ownership until the end of the payment term.

How do I decide which home buying option is best for me?

Deciding on the best home buying option depends on your financial situation, your long-term goals, and the laws of your state. Consider your ability to secure financing through traditional means, your need for flexibility in payments, and your comfort level with the risks associated with non-traditional agreements like land contracts or bonds for deed. Also try consulting with a real estate attorney or financial advisor to provide personalized advice based on your specific circumstances.

What are the implications of foreclosure in a deed of trust state?

In deed of trust states, foreclosure can proceed non-judicially. As a result, means homeowners may have less time to address the default and find alternatives to foreclosure. This may cause them to face financial difficulties.