Home financing can get more complicated and the documents you’ll sign at closing could be different from what you were expecting. Around 20 states actually use trust deeds instead of mortgages. California, Texas, and Arizona all fall into this category. A trust deed controls who’s going to hold onto your property title as you’re paying off the loan and it sets the terms for the process if you have trouble with payments later.
A mortgage is a contract between two parties. It’s you and your lender and that’s it. A trust deed brings in a third party called a trustee and this company holds the legal title to your property for the entire time you’re paying off the loan. A neutral third-party company is going to control your deed until you make that final payment when you buy a house in Arizona or Nevada. The whole foreclosure process works differently because of this extra party. Trust deed states can finish a foreclosure in just 60 to 120 days and they don’t even need a judge to approve it. Mortgage states have to go through the court system and it usually takes at least 6 months and can take up to a few years.
The speed difference between these processes is huge and it changes what homeowners can do when money gets tight. California homeowners get just 111 days from that first default letter until the bank sells the property. New York works differently since foreclosures go through the courts and homeowners there could get 5 years or more to work out a fix. Homeowners who move between states don’t usually know that the laws change this much. Some mortgage states also let the former owners buy their property back after foreclosure by paying everything that they owed. Trust deed states almost never give anyone that second chance though.
Each system works a bit differently and every state has its own preferred way of handling these cases. Some situations are bad enough that you should get a lawyer involved right away.
Two Title Systems for Your Home Loan
Banks don’t actually hold the title to your home during the life of your loan. Most homeowners have this misconception. The truth is there are a few more parts to it and it varies based on the type of loan you signed up for. The title arrangement works one way when you have a mortgage. A trust deed operates differently and there’s a third company involved that most borrowers have never even heard of.
A mortgage keeps the arrangement simple between just you and your lender. The bank lends you the money and in return they place a lien on your property as collateral. The important part is that the deed remains in your name for the entire time that you’re paying off the loan. It’s a clean arrangement and you always know who has what role in the transaction.
Trust deeds add another layer because they bring in a neutral third party known as a trustee. The trustee is the one who actually holds the legal title to your home for the entire time that you’re paying off the loan. Of course you still live in the house and you make every choice about the property like any homeowner would. The strange part is that some company whose name you probably don’t even remember technically has their name on the deed instead of yours.
Lenders really see the benefit of trust deeds when a borrower stops making their payments. Banks that hold traditional mortgages have to go through the court system first and then need to wait for a judge to sign off on the foreclosure. The entire process can take months and, in some states, it takes years. Trust deeds work differently because the trustee can start the foreclosure process on their own without any court at all. Arizona shows how fast the process can move. Trustees there can schedule a property sale about 90 days after a default.
Banks choose trust deeds because of this streamlined foreclosure process. The trustee just follows the procedures outlined in state law and proceeds with the sale since there’s no waiting for court dates or judicial approval.
Most borrowers experience some discomfort when they first learn that a trustee company technically holds their home’s title. It feels strange to know that the deed isn’t in your name or in your lender’s name either. The reassuring news is that the trustee has zero power over your property unless you actually default on the loan terms. The trustee also can’t make any decisions about your property without your consent as long as you’re current on payments.
Documents Change with Your State
The document you sign to buy a house depends on one factor, where you live. Some states use mortgages and others use something called trust deeds and they each achieve the same outcome for buyers. The difference is in the legal wording. Your state decided which one everyone uses a long time ago and the law gives you no choice in the matter.
California, Texas, Arizona, and Nevada are all trust deed states and they’ve been that way for a very long time. New York, Florida, and Pennsylvania have always relied on traditional mortgages for their real estate transactions. The reason for this split goes back generations. Every state built up its own legal framework for property transactions over a few decades and those frameworks became so embedded in the system that they still dictate how home financing works in each state.
Buyers who move from one state to another usually have no idea that this difference exists until they’re sitting at the closing table. You could have purchased multiple homes in Florida over the years and become comfortable with the mortgage process there. Then you relocate to California for work and, suddenly, you’re looking at a different set of documents and procedures. Real estate investors face this challenge constantly, particularly if they’re buying properties across multiple states. They have to become experts in both systems because different states play by different laws.
A handful of states actually allow either option. Georgia and Colorado give lenders the flexibility to choose which type of document they want to use for each transaction. We’re also seeing some newer hybrid documents pop up in some markets. These “mortgages with power of sale” take elements from both traditional methods and merge them into something that makes the distinction between mortgages and trust deeds less black and white than it used to be.
The rise of online lending businesses has created another wrinkle in this. An online lender headquartered in a trust deed state can work with borrowers in mortgage states. But the property location is what matters legally. The lender has to follow the laws of whatever state the property sits in, not the laws of their own home state. So online lenders need to be well-versed in multiple state systems if they want to operate nationally.
Your State and the Foreclosure Timeline
Most homeowners have no idea there’s any difference at all until they’re already in a tough spot. The paperwork might look similar and the monthly payments work the same way. But the consequences of falling behind on those payments really show where these two diverge.
States that use trust deeds give lenders a massive edge over borrowers and the speed at which they can foreclose is almost shocking. California is a perfect example of this. A lender there can literally take ownership of your house in as little as 111 days if you have a trust deed. At the same time, in a state like New Jersey that uses traditional mortgages, the same foreclosure process might drag on for well over a year. This dramatic difference depends on whether or not a judge has any say in the process.
Trust deeds bypass the court system and there’s no judge to review your situation and no courtroom where you can explain what went wrong. The lender just has to check off the boxes on a list and mail you certain notices on certain dates. They call this non-judicial foreclosure and once those deadline dates arrive, the lender can auction off your house regardless of your personal circumstances.
The mortgage states take a different strategy and make the lenders file a lawsuit in court. Every step of the foreclosure has to go in front of a judge and you actually get the opportunity to tell your side of the story and present any defenses you might have. Yes, this does make the whole process take much longer. But it also gives borrowers way more opportunities to negotiate with their lender or find a way out.
The timeline difference is what drives this home for most homeowners. Falling behind on payments in a trust deed state leaves you maybe 4 months total to solve the problem before you lose your house. But in a mortgage state, you could well have 6 months to a full year to work out new financing or negotiate different terms with your lender.
We saw this gap play out dramatically during the COVID-19 pandemic and the foreclosure moratoriums. The borrowers in mortgage states got tons of extra protection because the courts were literally closed for months at a time. The trust deed borrowers got far less relief because their foreclosures never needed a courtroom in the first place.
Different State Laws for Your Home
After a foreclosure happens, the next steps are different from one state to another. A handful of states actually let homeowners get their property back even after the foreclosure sale goes through. Other states make the sale final with no way to reverse it whatsoever. For families in the middle of financial trouble, these different state laws can change everything about their future.
Mortgage states like Minnesota have something that lawyers call a redemption period. Even after the bank has already foreclosed on your home and sold it to a new buyer, you still have a window to get it back. Minnesota gives homeowners a full 6 months to come up with the money they need to pay off their debts and reclaim their property. Throughout those 6 months, homeowners can stay in the house as they work to collect the funds. Michigan has this same type of system too. A family there could actually stay in their house for a few months after the foreclosure already went through and the whole time they can try to get it back. Maybe they’ll call relatives who can help them collect the money or maybe they’ll go look for a different lender who will give them new financing. The foreclosure sale itself ends up as just one part of a much longer process for these families, not the end of everything.
Trust deed states each have their own set of laws that homeowners need to know about. Arizona is a great example of how this system works in practice. When a trustee auctions off a home there, that sale is permanent and it takes effect right away. The former owners have to pack up and leave that same day. There’s no legal way whatsoever to reverse the sale once that auction gavel comes down. California follows the exact same strict procedures as well. A trustee sale is final the very second that it closes and the residents have to leave the property right then and there without any exceptions.
The difference in these systems is why speed and timing also become especially important for homeowners in trust deed states. Anyone who lives in one of these states and starts to have problems with their mortgage payments needs to take action quickly. After the trustee sale takes place, the options to save the home disappear completely. Without a redemption period as a safety net, there’s nothing left to protect homeowners from the permanent loss of their property.
Best Times to Hire Your Lawyer
When your home is in danger of foreclosure, every day counts and you absolutely need an attorney on your side. At this stage in the process, the distinction between a trust deed and a mortgage is almost irrelevant. These two documents set off a chain of legal events that move quickly.
Trust deed states make the situation worse because the timeline is significantly compressed compared to traditional mortgage states. Some states allow lenders to sell your house in as little as three weeks after default notices go out. Three weeks is hardly enough time to understand your options and it’s not enough time to mount a proper defense. Mortgage states will usually give you a few months and a court hearing at minimum. Trust deed states play by different procedures though.
Legal help can save you from plenty of problems when your property transaction seems to be going just fine. Private loans between family members are notorious for falling apart. Investment properties also have their own laws and they’re nothing like the ones for normal home sales. Deals can get messy fast.
The absolute best time to contact an attorney is as soon as the first missed payment happens. Don’t wait for the third or fourth letter to show up in your mailbox. Don’t wait until the auction date shows up on public records. Most experienced attorneys can negotiate workable payment arrangements or communicate directly with lenders while there’s still room to maneuver. A lawyer understands which documents to file and which procedures can halt or delay the foreclosure process.
Money concerns stop way too many homeowners from seeking the legal help that they desperately need. Yes, a lawyer might charge you $2,000 in different fees and costs. But a home foreclosure? That could wipe out hundreds of thousands of dollars in equity that you’ve built up over the years. Even worse, the bank can come after you with a deficiency judgment for whatever balance is left on your loan and they can chase you for that money for years.
Do You Need Help From a Lawyer?
If you are considering purchasing real estate, or have the option between a trust deed and a mortgage, you should consult with an experienced and local mortgage lawyer. An attorney will be most knowledgeable in terms of your state’s laws regarding trust deed vs. mortgage, and what your legal options are under those laws.
The difference between the two types of home loans depends on what happens if you can’t make your payments anymore. Trust deeds let lenders move faster through the trustee sale process but mortgages force lenders to go through the courts which usually gives you more time and more legal protection. You don’t actually choose which one you use when buying a home though. Your state’s laws have already decided that for you based on where you live.
Most homeowners have no idea what they’ve actually signed or what rights they have until the problems show up at their door. The right time to get legal help isn’t when the foreclosure papers arrive in your mailbox. It’s either when something in the paperwork seems off or different or when you know that next month’s payment is going to be a problem. Even just being aware if your state lets you buy your home back after a foreclosure can change how you manage money problems.
Step back and look at the whole picture, and neither system is actually better or worse than the other. They just operate differently with different requirements and timelines. The best strategy is to be sure about what you’re working with and to know when it’s time to bring in a lawyer who knows this area inside and out. Maybe you’re buying your first home or maybe you’re 10 years into your mortgage and money just got tight.
An experienced attorney can make the difference at this stage. With LegalMatch, you can connect with lawyers who know the ins and outs of your state’s laws whether you have a trust deed or a traditional mortgage. They’ll go through every line of your paperwork and will talk about your rights and work through whatever challenges you’re facing with your home loan. Use our platform to find a lawyer who knows your state’s foreclosure laws backwards and forwards and can protect you before small problems blow up into disasters.
