We have all heard of the term “mortgage” and most of us have an understanding of what it is. Sometimes we hear words like “deed of trust” used interchangeably with the word mortgage, but are they the same thing?
There are two different theories on how to secure debt on property: title theory and lien theory. In its simplest form, title theory makes it easier for a lender to foreclose on loans that have gone into default.
So, let’s get technical for a minute. What is the difference between a deed of trust and a mortgage?
What is a Mortgage?
A mortgage is a type of lien which is recorded in the public records which tells the world that a creditor claims you owe them money. The borrower is obligated to pay back the loan with a predetermined set of payments. What makes mortgage loans unique is that you are pledging the property as collateral for the loan, and the loan is said to be secured by real estate. This differs from unsecured loans such as credit cards. To foreclose a lender must sue the borrower and go through what is called a judicial foreclosure.
What is a Deed of Trust?
North Carolina is a title theory state and uses the three-party deed of trust instrument as security for the
debt. The borrower actually conveys legal title to the trustee (third party) to hold for the beneficiary (the lender) until the debt is satisfied. The trustee has the “power of sale” and is able to forcibly sell the property if the borrower defaults. The borrower has equitable title to the property. This means that the borrower has the right to demand the return of the legal title when the debt is paid.
Note, legal title gives the lender an interest in the property without right of possession (a.k.a. “naked-title”, “bare-legal title”). It is much easier for a lender to foreclose upon a borrower with a deed of trust then with a mortgage.
Wait! What does title mean? Title is just the right to, or ownership of real property. It can also be described as the evidence of ownership of land.
Okay, so if you can’t pay the loan you can just give the keys back to the bank, and let them take the house right? No, the bank isn’t going to let you off that easy!
The Promissory Note
The promissory note is legal evidence of debt between a borrower and a lender. It is also the written promise to repay a debt in definite terms. This is where the consequences of foreclosure come in. If you default, the bank will foreclose on you, get the sheriff to kick you out, and take the house back.
Is that all? NO! The promissory note holds you PERSONALLY LIABLE for the debt still owed on the property. This is where the lender comes and slaps you with a deficiency judgment down the road.
So, I hope this explains the basics of a mortgage and a deed of trust.