Most people think of a mortgage as a type of home loan. However, the legal definition of a mortgage is different. In legal terms, a mortgage is an agreement between a borrower and a lender. A deed of trust is another type of agreement that lenders may use in place of a mortgage.
Deeds of trust and mortgages serve similar functions in real estate transactions, but they have significant differences. This two-part post will cover what people need to know about mortgages and deeds of trust.
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Mortgages are contracts with two parties: the lender and the borrower. Under these contracts, the lender agrees to provide a loan so the borrower can buy property. On the borrower’s end, they agree to put the home up as collateral to secure the loan.
The borrower then has an obligation to repay the loan under the contract terms. If the borrower fails to make payments, the lender can initiate foreclosure to recover the debt by selling the property. Essentially, the mortgage creates a lien on the property to ensure the lender has rights to foreclosure.
With deeds of trust (also known as trust deeds), you have three parties: the borrower, the lender, and a trustee. Many states use deeds of trust for home loans instead of traditional mortgages. However, it is a similar type of loan agreement.
Like a mortgage, it is a contract outlining the terms of a home loan. However, the borrower does not possess the title of the home. The trustee holds the title until the borrower repays the loan in full. In the meantime, the borrower has equitable title and the right to use and possess the property. If the borrower fails to repay the loan, the lender can go to the trustee to start foreclosure.
These are the basic definitions of mortgages and deeds of trust. However, there are important similarities and differences so come back for part two for a deeper look at how deeds of trust and mortgages differ.
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