Mortgage or Deed of Trust?
A Rose by Any Other Name May not be the Same Mortgages, Deeds of Trust, and Deeds to Secure Debt
Mortgages, Deeds of Trust, and Deeds to Secure DebtWhen real estate purchasers apply for a loan, they call it a mortgage. In about 35 of the states, a mortgage is what they will sign at closing. However, in the remaining 15 states, the purchaser, instead, will sign a deed of trust or a deed to secure debt.
Although mortgages, deeds of trust, and deeds to secure debt all result in the real estate being collateral for loan, they are not the same. The difference between mortgages and deeds of trust (called deed to secure debt in some place) is based upon two different legal theories: the lien theory and the ownership/title theory.
Lien Theory vs. Ownership or Title TheoryLien theory states are the most common. They use mortgages. A lien is an encumbrance on the real estate. The purchaser keeps title to the real estate. However, the real estate owner gives the lender a security interest in the real estate as collateral for the mortgage loan.
Ownership or title theory states use deeds of trust or deeds to secure debt. In those states, the purchaser does not keep title to the real estate. Instead, the purchaser transfers ownership to a lender or more commonly, a trustee.
The deed of trust will allow the borrower to use the real estate as long as the debt payments are made. When the borrower has paid off the loan, title to the real estate goes back to the borrower. However, if the borrower defaults, then the trustee is given permission to take possession of the real estate.
Despite these theoretical differences, from the borrower's perspective, a mortgage and deed of trust may appear the same. In both a mortgage and deed of trust, if the borrower makes timely payments on the loan, the borrower will be able to use the real estate. And, with both a mortgage and deed of trust, when the debt is paid off, the borrower will own the real estate free and clear.