Mortgage vs. Deed of Trust: What’s the Difference?
In this episode of Coffee with Carl, attorney Carl Zoellner explains the basic differences between two significant real estate documents: a deed of trust and a mortgage.
At their most basic, both a deed of trust and a mortgage function as liens against the title of a piece of property, or as a security interest often tied to a loan of some sort. If I am lending money for a property or project, what I’m actually doing is depending on the state by filing either a deed of trust or mortgage against the property. In doing this, I’m taking that collateral of the actual property to make sure I get paid out on its sale.
The easiest way to visualize this would be with the example of purchasing a personal residence. When you purchase your personal residence, you’ll probably take out a loan. The bank then puts out a mortgage on that property, so that they have a documented interest in it. Then, if you sell it, they get paid.
Deed of Trust vs. Mortgage: The Basics
From a functional standpoint, there are three parties to a deed of trust: the lender, borrower, and trustee. Normally, that trustee will be a banker or title company. When you compare the parties to a deed of trust versus a mortgage, you’ll note that there are only two parties to a mortgage: a lender and borrower.
Additionally, some states only allow for a deed of trust, while some only allow for a mortgage, and a couple allow both.
The big difference between these two real estate documents is that a deed of trust requires a third party (a trustee), whereas a mortgage does not.
Normally, when a property is sold, the title company will see the note on title (whether a mortgage or deed of trust) and pay it out. This is especially important for all the lenders and property developers out there. Some of our clients engage in these types of lending or developing activities, so if this is you, be aware of what the appropriate process is so you can make sure your ducks are in a row. You want that note on title because, if it’s not, then the loan is not secured and the buyer has no notice of that lien on the property. Then, if they purchase the property, they would purchase it free of that lien. So the deed of trust or mortgage is essential to making sure the lender gets paid.
One other item worth mentioning related to this topic involves hard money lenders. If you’re working with a hard money lender on a project, the hard money lender may not want to see a second lien on title. In that case, you’d need to work with the lender to make sure they’re comfortable with the business proposal on all fronts. There are lots of different ways to set up a real estate transaction — it doesn’t have to only be the loan and lien scenario we’re discussing here.
If you’d like to discuss your real estate moves with an experienced professional, schedule your complimentary Strategy Session with a Senior Advisor today. On the call, you’ll build the best custom entity structure for your individual situation. If you’d like, we can even help you implement each step. You can schedule online or by calling 888.871.8535.
Watch as Carl breaks down the major differences between deeds of trust and mortgages in real estate.
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