Lanny is finally in a position to buy his first home. He has begun to research the entire process so that he has some comfort level about the purchase. In his research, he has found references to "mortgages" and "deeds of trust." In some of the articles he has read, the terms are used interchangeably. What is the difference between the two?

In connection with real estate financing, sometimes the terms "mortgage" and "deed of trust" are used interchangeably. The two are not the same. In fact, important differences exist.

What Is a Mortgage?

A mortgage is a document that evidences a lender's security interest in a home.

There are two parties to a mortgage: the borrower and the lender. At the time the lender makes the loan, the lender records the mortgage among the appropriate public records so that others are put on notice of the lender's security interest in the home. In the event the borrower fails to repay the mortgage indebtedness in accordance with the terms of the loan, the lender has the right to foreclose on the property secured by the mortgage. The process is referred to as a "judicial foreclosure." More than one-half of the states in the United States use mortgages as security instruments. The other states use deeds of trust.

What is a Deed of Trust?

Essentially, a deed of trust serves the same function as a mortgage; however, there are a few important differences. As is the case with a mortgage, a deed of trust is recorded among the appropriate public records. It shows that there is a lien on the property at issue. A deed of trust involves three parties: a borrower, a lender, and a trustee. The trustee holds temporary title until the indebtedness is repaid by the borrower. Notably, the trustee has the power to sell the property if the borrower defaults on the loan. The process upon default does not involve the court system.

The manner in which a mortgage loan is secured is determined by state law. As the relevant laws vary from one state to another, the applicable state law should be consulted for further details.

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