For first-time home buyers in particular, home financing documentation can be confusing.
First, it’s important to know that the document that shows how much you owe your lender is called a “note” and you make a note payment monthly.
But when you purchase a home, the document that shows who owns the property is called either the “Mortgage” or the “Deed of Trust,” depending on the state you live in. Both are called “security instruments” and they both serve the same purpose: to secure repayment of the loan, in different ways.
The primary differences between a mortgage and a trust deed include the number of parties involved in the transaction and the procedure used for enforcing the lien on a foreclosure.
A mortgage involves two parties: the borrower and the lender. If you live in a mortgage state and you default on the note, you will work directly with the lender, who will go through the court system to reclaim the property should you falter to make your monthly payments.
This can be a drawn-out process and includes court filings and specific time periods that have to be given to you, allowing you every possible opportunity to reinstate (get caught up on) the note.
Depending on the caseloads of both the court and lender, this could take anywhere from three to six months to well over a year to complete.
A trust deed involves three parties: the borrower, the lender, and the title company, escrow, or bank. If you live in a Deed of Trust state, the third party, called a “Trustee,” will intervene on behalf of the lender in the case of default.
Unlike the lengthy judicial process described above, this will happen much more quickly, as the trustee has the right (as provided for in the Deed of Trust) to take ownership and sell the property in order to recoup the lender’s money.
If you have any questions, contact your mortgage advisor to elaborate on these security instruments.