If you're like most people, you probably don't know what a trust deed or deed of trust is. In real estate transactions, the terms "trust deed" and "mortgage" are often used interchangeably. Nevertheless, there are some crucial differences between the two instruments, and some states don't use mortgages at all. If you go through the foreclosure process, understanding the difference is essential.
The Deed of Trust
Unlike a mortgage, which has a lender and a borrower, a trust deed has three parties: the beneficiary (the lender), the trustor (the borrower) and the trustee (the title holder). When the loan is paid in full, the trustee transfers ownership of the title to the trustor; however, if the trustor defaults on the loan, it's the trustee's job to initiate a foreclosure proceeding. Trust deed foreclosure proceedings are non-judicial; that means they don't involve the courts.
Defaulting on a Trust Deed
A trustor has a major advantage in a trust deed deal, because if he defaults, only the house is at risk because an action isn't filed in court. In other words, if the home loan is foreclosed upon and the beneficiary can't recoup all the losses from the loan, the beneficiary may not sue the trustor for the deficient balance. It also may not sue the trustor for wages or investments to recover the loss; this is known as the antideficiency rule. However, the trustor may not repurchase the home at auction, called the right of redemption.
Consequences of Non-Judicial Foreclosure of a Trust Deed
Since trust deeds use non-judicial foreclosure via the "power of sale," there is a greater possibility that litigation may result over the title. As a result, if a new borrower purchases the home at a foreclosure auction, there is a greater chance that a title issue may occur. The beneficiary often retains the right to purchase the property at foreclosure as well; mortgages call for judicial foreclosures and lenders must act impartially when selling the property, although laws and statutes vary by state.
Where Trust Deeds Are Used
Several states don't use mortgage notes, but instead use the deed of trust. As of 2011, these states include Alaska, Arizona, California, Georgia, Missouri, Nevada, North Carolina, Virginia and the District of Columbia. Some states use both; these are Colorado, Idaho, Illinois, Maryland, Montana, Nebraska, Oklahoma, Oregon, Tennessee, Texas, Utah, Wyoming, Washington and West Virginia. The remaining states must use a mortgage agreement, and borrowers must submit to the judicial foreclosure process, if necessary.