When financing real estate, the question of whether to use a deed of trust vs mortgage is not just a matter of terminology; the lender’s rights and remedies in the event of default are significantly different depending on which security instrument is used.
For private lenders, fund managers, and real estate investors, understanding the distinction between these two instruments and when they are used is essential to protecting your investment and ensuring enforceability in your target states.
Below, we’ll break down how to choose between a deed of trust vs mortgage, and the key differences between them.
The Key Difference
At their core, both a deed of trust and a mortgage are security instruments that protect the lender’s interest in a property when extending credit. The difference lies in how these instruments function legally and the parties involved.
- Mortgage: In a mortgage agreement, the borrower conveys an interest in the property directly to the lender. If the borrower defaults, the lender must go through a judicial foreclosure, which can be time-consuming and expensive depending on the state.
- Deed of Trust: In this model, the borrower transfers the property to a third-party trustee who holds the title until the loan is repaid. If the borrower defaults, the trustee can execute a nonjudicial foreclosure, which is often much faster and more cost-effective.
Because of this structural difference, many private lenders prefer lending in states that use deeds of trust to benefit from the expedited nonjudicial foreclosure process.
State Law Matters: Deed of Trust vs Mortgage?
Whether a lender uses a deed of trust vs mortgage depends heavily on the state where the property is located. For example, most western states, including California and Arizona, use deeds of trust, which allow for non-judicial foreclosure and typically result in faster, more cost-effective remedies. In contrast, judicial foreclosure states like New York or Florida require court involvement, often extending the timeline and cost of recovering the asset.
Considerations for Private Lenders
Whether you’re structuring a one-off deal or managing a mortgage fund, it’s essential to evaluate the following:
- Foreclosure speed and cost: Deeds of trust often allow for a faster exit strategy.
- Judicial vs. nonjudicial process: Mortgages typically require court involvement.
- Borrower protections: Some states impose more stringent notice and redemption requirements under mortgage regimes.
- Title insurance and documentation: Ensure proper drafting and recording of security instruments based on local rules.
Failing to use the correct instrument can jeopardize enforceability, especially if you’re a lender operating without an in-house legal team. Working with an experienced law firm that understands state-specific nuances is critical.
Choosing the Right Instrument: Legal Guidance Is Key
Private lending thrives on precision. There’s no room for guesswork when it comes to compliance. Whether a deed of trust vs mortgage is the appropriate security instrument, having a clear understanding of the legal framework can protect your investments and streamline your operations.
To explore state-specific lending strategies or ensure your documentation aligns with current regulations, Fortra Law offers industry-specific legal support tailored to private lenders, fund managers, and investors nationwide.
Need help choosing the right instrument for your next deal? Contact the Fortra Law team today to ensure your security documents are enforceable, compliant, and designed to protect your capital.
