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The Differences Between a Deed Trust and a Mortgage

By Colleen Colkitt


The basic principle behind a mortgage is a person purchasing a piece of real estate uses a mortgage, which is the sum needed to be borrowed in order to finance the property. The borrower has to make a down payment that can go towards the loan and interest is paid at a certain percentage rate.

Mortgages are typically paid over 15 or 30 years, and the interest rates differ in each situation. Credit scores and eligibility also factor into how much a borrower can get out of the loan.

The main thing setting mortgages and deed of trust a part, if that when a borrower takes out a mortgage loan, it involves a mortgage note. The note acts as the lien on the property because the borrower cannot sell the house again until the debt of the loan is repaid.

Either a lender or a borrower can hold the title to the house depending on state law. In "title theory" states, the lender keeps the title and owns the house until the borrower can satisfy the loan. However for "lien theory" states, the borrower has the title and owns the house, but the mortgage note allows the lender to have rights to seize and sell the house for non-payment.

Deed of Trust

With a deed of trust, the legal title of the property is transferred to a trustee, who holds it as security for the loan, like collateral, between the borrower and lender. However, the equitable title is still with the borrower.

Typically, the lender gives the borrower money to buy the property and the borrower gives the money to the seller. The seller prepares a grant deed, which gives the property to the borrower, and the borrower executes a deed of trust giving the property to the trustee who is to be held in trust for the lender or beneficiary.

To put it simply, the deed of trust brings in a third party, a trustee, to hold the title. This third party could be a bank or lawyer, but they must remain neutral. Once the borrower repays the loan, the lender has the trustee to release the title to the borrower, who will now own the property.

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