Just because you took out a loan to purchase your home, this doesn't necessarily mean you have a mortgage. In 35 states, you may have a deed of trust instead. In fact, nine states allow for both deeds of trust and mortgages. Not only is there a practical distinction between the two, but there are legal implications as well. They can affect homeowners in both subtle and profound ways.
Title Theory States
Most states that use deeds of trust to secure home loans are title theory states. In these jurisdictions, you don't actually have title to your home. A third party holds the deed. When you purchase the property, the seller gives you title, which you're then obligated to turn over to the third party, called a trustee, as security for your loan. In some title theory states, the deed is held by the lender itself, not a trustee. If a third party trustee is not involved and the lender holds title directly, you may have a mortgage, not a deed of trust.
You can make sure by having a professional review your loan documents. In either case, when you pay off your loan, title to the property reconveys to you through a second deed, giving you full ownership of the property. A few deed of trust states include West Virginia, Alaska, Virginia, Arizona, Texas, California, North Carolina, Colorado, New Mexico, Idaho, Montana, Illinois, Missouri and Mississippi.
Lien Theory States
Lien theory states are mortgage states. You hold the deed to the property you purchased, and your lender uses your mortgage to legally create a lien against your home. Only two parties are involved – you and the lender. Provided you don't default on your loan, this is a much simpler and neater arrangement than a deed of trust.
Understanding Foreclosure Issues
The difference between a deed of trust and a mortgage is little more than a technicality unless you default on your home loan. Deeds of trust allow for non-judicial foreclosure proceedings. If you fall behind with your payments and can't catch up, your lender can instruct the trustee to sell your property. It's that simple. In most deed of trust states, you'll receive one or two notices first, alerting you to the event, and then the trustee can auction your property to the highest bidder.
The trustee already has your deed, so it has the right to sell the property. In a mortgage state, your lender needs court approval to foreclose and this involves suing you first, giving you an opportunity to go to the hearing and try to forestall the sale. This process is known as a judicial foreclosure. With court approval, your lender can auction your property, but this typically won't happen as quickly as it would with a deed of trust in a non-judicial foreclosure state.
Exploring Current Deficiencies
Even if you live in a deed of trust state, your lender has the option of a judicial foreclosure. The company is not locked into taking the easy route, and it may not want to. Judicial foreclosures allow the lender to pursue you after the auction if your property does not sell for enough to cover your outstanding mortgage.
For example, if you owe $300,000, and if your home sells for $275,000, your lender has no recourse to try to collect the other $25,000 if it opted for a non-judicial foreclosure process. You'll lose your home, but you won't have to worry about the lender garnishing your wages for the difference. If your lender pursued a judicial foreclosure instead, you're on the hook for the balance.
Rights of Redemption
With deeds of trust and non-judicial foreclosures, the auction of your property is the end of the road. You typically have plenty of opportunity until this date to try to save it, but after it's sold, it's gone. Mortgage states commonly allow redemption periods after the sale. You may have several months or more to try to pay off your entire mortgage so you can reclaim your property.
- Grabois Ltd: Title Theory States Vs. Lien Theory States
- Rocket Lawyer: Which States Allow Deeds of Trust
- American Bar Association. "Commercial Real Estate FAQs: What Is the Difference Between a Mortgage and a Deed of Trust?" Accessed July 31, 2020.
- Cornell Law School. "Deed of Trust." Accessed April 6, 2020.
- Consumer Financial Protection Bureau. "Deed of Trust." Accessed July 5, 2020.
- American Bar Association. "Glossary of Real Estate Terms: Deed of Trust." Accessed July 31, 2020.
- Consumer Financial Protection Bureau. "How Does Foreclosure Work?" Accessed July 5, 2020.
- American Bar Association. "Mortgage Note -- Deed of Trust Note." Accessed July 31, 2020.
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.