When financing a purchase of real estate, purchasers frequently encounter the terms “mortgage” and “deed of trust.” While they may seem that they are the same and are frequently used interchangeably, they represent distinct legal instruments used in real estate transactions. Both documents secure a loan by placing a lien on the real estate in question, but they function differently and involve varying parties.

What Is a Mortgage?
A mortgage is a legal agreement between a borrower and a lender that secures the repayment of a loan by placing a lien on the property. In a mortgage arrangement, the borrower grants the lender a lien allowing the lender to foreclose on the property if the borrower defaults on the loan. With a mortgage, the foreclosure process is usually a judicial matter meaning that the lender must file a lawsuit in court to foreclose and sell the property. Effectively, the court must approve the foreclosure process. Mortgages are generally utilized in “lien theory states” where the title to the property generally remains in the name of the borrower unless and until there is a foreclosure of the property.

What is a Deed of Trust?
A deed of trust is a security instrument that involves three parties – the borrower, the lender and the designated trustee. Unlike a mortgage, a deed of trust transfers legal title to the real estate involved to a neutral third party, known as a trustee, who holds the title in trust until the loan is repaid. In the event of a default, foreclosure under a deed of trust is usually a non-judicial matter meaning that judicial involvement is not required. The trustee can initiate the foreclosure process by selling the property in order to repay the indebtedness. Deeds of trusts are generally found in “title theory states” where the trustee holds title to the real estate until the loan is repaid.

Conclusion
Both mortgages and deeds of trust serve similar functions—securing a loan by using real estate as collateral—but the processes and legal structures involved differ significantly. The key distinctions include the number of parties involved, the foreclosure process (i.e., judicial vs. non-judicial), and the title structure (i.e., lender holding title vs. trustee holding title). The choice of instrument typically depends on state law, so borrowers should be aware of the specifics of their local real estate laws when entering into a loan agreement.

Ultimately, understanding these differences can help borrowers navigate the loan process, anticipate the foreclosure procedure and understand the protections, or lack thereof, afforded by each agreement type. Whether you're securing a mortgage or a deed of trust, it's essential to consult with legal or financial professionals to ensure you're making informed decisions about your real estate financing.