Difference Between Mortgage And Deed Of Trust

What Is A Mortgage?

Put simply, a mortgage is a loan that uses property as collateral. It is an agreed amount of money that you borrow from a bank, other entity, business or individual to facilitate the purchase of a home or business property. 

All loans require some form of collateral, whereby if you are unable to make the contracted payments, you could forfeit a particular item or asset. With a mortgage, it is defined that the property you intend to purchase with the mortgage amount will be that collateral. The main way mortgages differ from other loan types is that they can only be used to purchase property.

What Is A Deed Of Trust?

A deed of trust is a legal agreement between two parties regarding the sale of a property. It is a formal, written document which outlines the mortgage repayments between the seller and buyer. 

Essentially, it stipulates that the buyer agrees to take over the mortgage repayments of the property from the seller, once the sale has closed. It also confirms that the property will technically remain “owned” by the mortgage lender until the mortgage has been fully repaid.

Does California Use Mortgage Or Deed Of Trust In Property Sales?

The very simple and short answer to this question is that California uses both. Many other states will not add a deed of trust to the sale of a home. Instead, they rely on the mortgage lender to transfer the appropriate debt from the seller to the buyer. This comes with its own variety of legal paperwork. 

But a deed of trust is more formal, binding both parties to the agreements as outlined within the details of the sale. It assures the mortgage lender that the debt will be repaid and that they retain official ownership of the collateral (the property being sold) until the loan has been paid in full, including any relevant interest.

How Does A Mortgage Differ From A Deed Of Trust?

A mortgage is a legal contract that focuses almost exclusively on the borrowing of money. It is an agreement between the person loaning the money and the person receiving it, formalized in law. It outlines the amount to be borrowed, how much interest is to be paid, the length of the loan term, the amount of each repayment and when these must be paid. It is between the mortgage lender and the borrower only.

A deed of trust is a different legal document which ultimately is between three parties: seller, buyer, and mortgage lender. It clearly states the date of the sale, amount paid, settlement or escrow term, and includes who will bear responsibility for paying the mortgage and when. In essence, it is a legal contract which should be considered in conjunction with the mortgage itself.

It makes clear that the buyer is agreeing to commence making mortgage repayments from a certain date, at which time, the seller will cease making payments. This reassures the mortgage lender that they will continue to receive relevant payments for the loan amount, regardless of who owns the property.

Summary

A mortgage and deed of trust may be very different documents, but they work together to protect buyers, sellers, and mortgage lenders. Understanding the different steps in the home sale process in San Diego is important to getting the most value from your home. When considered together, they provide a clear overview of everyone’s responsibilities and ensure that money will be paid by the appropriate person or entity at the appropriate times.

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