Know the Difference
While most consumers use “mortgage” and “home loan” interchangeably, the legal definition of these terms is different. This may not matter to you so much when you’re contemplating buying a home, but if you experience financial difficulties and the possibility of foreclosure, you’ll need to understand the impact of these terms and your state laws.
Home Loan vs. Mortgage
The term “home loan” refers to the actual money a lender loans you (and co-owners, if there are any) so you don’t have to pay cash for your home purchase. Like any other loan, there are terms and conditions that apply on how you must repay the money. A home loan is a secured loan, which means your house itself is the collateral.
A “mortgage” legally refers to the document by which a homeowner transfers to a lender the actual interest in the real estate itself to secure the repayment of the loan debt. This document comes into play if you are unable to make payments on your home loan, because it’s the legal proof the lender has the right to foreclose on your home and sell it in order to have the loan repaid.
The mortgage document creates a lien on your property recorded at your county courthouse, usually. The lien must be paid in full before you can transfer ownership of your home to anyone else.
Mortgage vs. Deed of Trust
In addition to understanding the difference between a home loan and a mortgage, you need to know the definition of a deed of trust, which is an alternative to a mortgage used by many states.
While a mortgage is a document defining the legal relationship between you and your lender, some states instead use a deed of trust as the document that must be recorded to show there’s a legal claim on your property. A deed of trust involves three parties rather than just you and your lender: in addition to the “trustor” (you, the homeowner) and the “beneficiary” (the lender), a “trustee”—typically an attorney or a title company representative—must also sign the deed.
The trustee holds temporary title to your property until the lien is paid in full and must be a neutral third party who won’t favor either you or your lender in the case of a dispute. As a borrower, you don’t have a choice as to whether to record the lien against your home with a mortgage or a deed of trust: that decision is entirely up to your state laws. In general, whether you have a mortgage or a deed of trust won’t matter at all. The only time this makes a difference to you is if you face foreclosure.
If your lien is recorded as a mortgage, then a foreclosure will typically be required to go through the state court system. If your lien is recorded as a deed of trust, then the trustee has the legal power to sell your home if you haven’t made payments. Your lender has to provide proof to the trustee and ask for foreclosure proceedings to begin. The trustee must follow state laws and the instructions in the deed, but typically a foreclosure in these circumstances will proceed much faster than one going through the court system.
As long as you repay your home loan, either your mortgage or your deed of trust will be canceled once you make your final payment.