When looking to buy a home in Texas, it is important to conduct prior research in order to make informed decisions. Many home owners often skip this crucial step and end up making decisions they later regret. An important issue to understand when you are looking to buy a home in Texas is the difference between a mortgage and a deed of trust. Why? Texas is a title theory state where the property title remains in trust until payment in full is made for the underlying loan. The document that secures the title is usually called a deed of trust but may also be referred to as a mortgage.
A deed of trust is a contract that involves three parties. These three parties are commonly referred to as the trustor (borrower), trustee (guarantor) and the lender (beneficiary). The lender makes the loan to the future home owner to buy the house. The trustee holds the title to the property until the loan is repaid in full, at which time the trustee notifies the lender and the title is released to the homeowner.
A mortgage loan is a direct agreement between the lender and the borrower. Depending on the state, the lender or the borrower can hold title to the property. The mortgage acts as a lien on the property that must be paid in full before the property can be sold.
The deed of trust and mortgage contain information on the loan amount, the interest rate, late payment fees, the date of maturity of the loan, prepayment penalty as well as any material information. The decision to use a deed of trust or a mortgage lies with the state of residence. In Texas, the deed of trust is used for such transactions because the trustee is generally considered as an independent party in the transaction. With that in mind, here are two intrinsic differences between a mortgage and a deed of trust.
Texas is a deed of trust state and a deed of trust has three parties who are the trustee, borrower and lender. A mortgage on the other hand has only two parties who are the borrower and lender.
The way foreclosure of a property is handled is the crucial difference between a mortgage and a deed of trust. Foreclosure is a far more rapid process with a deed of trust because the trustee holds the power to sell the property if the lender provides proof that the borrower has defaulted on their repayment obligation. This is referred to as a "non-judicial foreclosure" and does not need to go through the court system. The deed of trust favors the lender rather than the borrower. With a mortgage, the lender must go to court to get permission to take back ownership of the home, so it can be sold to cover the lender's costs. This can be a long and complicated process. Mortgages favor the borrower because it provides more time for the borrower to catch up on their obligation, or restructure their mortgage loan before the property is actually foreclosed and taken from them.