Whether you are borrowing money from a friend, bank or mortgage lender, you might be required to pledge your home as security. Depending upon the laws in the state in which the transaction is taking place, you will be required to sign a promissory note and either a mortgage or deed of trust.
A promissory note represents your personal promise to repay a debt. Written in the note will be the following terms:
. Amount borrowed
. Interest rate
. How the debt is to be repaid: lump sum or periodic payments
. Penalties charged by the lender for late payments
If the debt is to be secured by a lien on your home or other real estate owned by you, then you will be asked to sign either a mortgage or a deed of trust. A mortgage gives a lender the right to bring a court proceeding to foreclose on the property in the event you default in repaying the debt.
The mortgage document is recorded with a county clerk or other county office that maintains county real property records. Once recorded, the debt referenced in the mortgage document becomes a lien on the real property. A deed of trust also secures the debt with the real property you pledge, but it differs from a mortgage in two very distinct ways.
Difference One: A deed of trust includes a third party to the transaction
Mortgages are between you and your lender, but a deed of trust adds a third party to the process. Besides the secured party and the borrower, a deed of trust also involves a trustee. The trustee holds legal title to the pledged property until the debt is paid in full.
If you borrow money and sign a mortgage, you retain legal title to the property. All the mortgage document does is give notice to anyone searching the county records of the existence of the lien on your property and the right of the lender to foreclose in the event of a default.
Difference Two: A deed of trust gives a lender more rights than does a mortgage
As a general rule, states using mortgages require lenders to file a court action to obtain a judgment allowing them to force a sale of the property to satisfy the debt. Twenty-two states require judicial proceedings to foreclose on the pledged property.
Most states in which a deed of trust is used instead of a mortgage allow non-judicial foreclosure. In the event of a default by a borrower, the trustee holding legal title to the property has the right to sell it a public auction on behalf of the secured lender. Non-judicial foreclosure with a deed of trust can be completed substantially faster than foreclosure proceedings that must go through the courts.
Most states authorizing non-judicial foreclosure require language in the deed of trust authorizing it. The absence of power of sale language in a deed of trust could prevent a lender from using the expedited procedure. The best way to know if your deed of trust allows for non-judicial foreclosure is by having the document reviewed by an attorney.