Difference Between a Trust Deed and a Mortgage

All else being equal, it's safer to invest in a trust deed than a mortgage. An investor can usually foreclose on a trust deed much faster than a mortgage.

In a mortgage, there are two parties. The borrower is the mortgagor because he's the grantor of the mortgage deed. Note the similarity of the two words - mortgagor and grantor. They both end in "or". The lender is the mortgagee. The mortgagee is the grantee of the mortgage deed; i.e., the lender is the receiver of the grant of the mortgage deed.

Mortgages can take six months to several years to foreclose because the lender has to involve the courts, and court calendars can get swamped.

In contrast, a deed of trust involves three parties, rather than two. The trustor (the grantor of the deed of trust) is the borrower. The trustee is a neutral party, like a title company or an attorney. The trustee receives the grant of bare legal title while the loan remains outstanding. The final party is the beneficiary of the trust; i.e., the lender.

The borrower (grantor) conveys bare legal title to the property to the trustee for the benefit of the lender (beneficiary). Basically the deed of trust says that the trustee will hold onto the title to the property until the loan is either repaid or until the property is sold in a foreclosure sale for the benefit of the lender.

Now here is the key thing about trust deeds. The lender does not have to involve the courts in order to foreclose. The lender merely notifies the trustee of a default on the promissory note, and the trustee starts the foreclosure process privately (without involving the courts). As a result, it is very easy to foreclosure a trust deed in less than five months.

The sooner a lender forecloses, the sooner he can protect the property from waste or vandalism. While many mortgage investments can be excellent investments, all things being equal, a trust deed is better.

If you are an accredited California investor and you would like more information about investing in trust deeds, please click here.