Learn the difference between a mortgage vs deed of trust. A deed of trust is legal document that is used to secure a loan with property as collateral. There is a borrower, lender, and trustee. The borrower is obviously the person or persons who borrow the money. The lender is the giver of the loan. The trustee is an independent third party who keeps title to the property until the loan is paid off by the borrower in totality.
A mortgage is the legal document that pledges the real estate as collateral. The mortgage explains that if the lendee (mortgagee) does pay the property back as promised in the promissory note, then the lender (mortgagor) can confiscate the property.
Mortgages and deeds of trust essentially act the same. They are used to create the lien against the real estate. The real estate is used as collateral.
Different states use either deeds of trust or mortgages. But, again they are pretty much the same.
Mortgages and deeds of trust are different from the note, which the document in which the borrower agrees to pay back the loan.
In this article, we will use the term mortgage and deed of trust interchangeable.
How A Mortgage Works
Mortgage documents can range from a few pages to many pages in length, depending on the type of mortgage or how it was drafted.
Mortgages may have a gap of 2.5-3 inches in length at the top of the page at the very beginning. The reason for this gap is that the county recorder will enter their recording information.
Unlike promissory notes, mortgages get recorded in the county which the property is purchased. The beginning of the mortgage states the date which the mortgage was made and between which parties, i.e., the grantor and the grantee.
The grantor (or mortgagor) is the person or entity who gives something, and the grantee (or mortgagee) is the person who receives something. The grantor is the single person, and the grantee is the lender.
What’s In a Mortgage?
When a bank provides a loan, the home buyer provides the bank a mortgage. The mortgage states how much money was loaned by the lender to the borrower and provides for monthly installments of principal and interest along with the due date which the loan should be fully paid off, which is also known as the maturity date.
The monthly payments are listed in the promissory note. It is essential that the mortgage include all the improvements as well. In addition, the borrower is promising that they have a right to borrow money against the estate.
HOA
There can be added riders in a mortgage that mention planned unit developments like HOAs (home owners associations). HOA fees, if necessary are generally not included in the mortgage document.
However, the lenders will sometimes include the HOA fees in the document because the HOA lien could take priority over the mortgage.
The application of payments is also included in the document. They explain how payments will be applied by the lender when they are received, i.e., first to interest payable on the note and then to interest payable on the note.
Taxes
If the borrower is not paying their taxes and insurance, the lender can make those payments. Then, when the borrower starts making payments again towards the mortgage, before they are credited for the mortgage payments, the lender reimburses themselves for the payments that they made towards the taxes and insurance.
Borrower Responsibilities
The mortgage document includes language referencing that the borrower must perform all financial obligations, such as other mortgages.
Mortgages may also require the borrower to keep the property insured and not allow it to deteriorate. The lender’s security shall also be protected within the document.
Other language within the document enables the lender to make reasonable inspections of the property provided the provided the borrower notice ahead of time.
Usually, all successors and assigns are bound within the mortgage document. This means when you buy the mortgage note and take the assignment of the note, you may not make changes on the borrower.
The laws that govern the transaction are also detailed on the document. Information about rehabilitation is also included within the document. This provides context regarding if money is borrowed to rehab the property, it may only be used for that purpose.
Generally, a notice of acceleration is also included. If the borrower sells the property, they are required to pay the lender back immediately and not by the maturity date. This information is covered more in the transfer of the property section of the agreement as well.
Right to Reinstate
The foreclosure process may begin when the borrower falls behind on the mortgage payments.
If the borrow has fallen behind on payments, the lender may not deny them the right to attempt to get completely caught up on payments and forego foreclosure.
If the property is a rental house, and the landlord is not making payments, there may be a clause in the document that allows the lender to go around the borrower, to the tenant and collect rental payments. The document can also forbid the mortgagee from making hazardous materials in the property.
Notice of Request for Default
There may also be a notice of request for default. This will generally be seen in second mortgages because these people who are in second position will send notice to senior lien holders to inform them that they’d like to be notified if they do not pay their first mortgage because they do not want to get wiped out.
A mortgage/deed of trust is one of the most important documents used when buying a property using other people’s money
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