Understanding Mortgage Deeds: How Mortgage Deeds Work

A mortgage is a loan extended to someone in order to purchase a property. A mortgage deed is a legally binding document outlining the terms of a mortgage that puts a lien on the house until the lender repays the loan in full. The mortgage deed gives the lender secure interest in the property that they loaned money to the borrower for, protecting them in the event that the loan is not paid off. If the borrower fails to pay back the loan, the mortgage deed may grant the lender the legal rights to foreclose or take ownership of the real estate, usually following litigation.

A mortgage deed allows the bank (or lender) to hold a homebuyer’s house as collateral until they repay their loan in full. In a real estate transaction, the lender—typically a bank—and the property buyer will agree on the terms of a mortgage loan, including the size of the home loan, the deadline for paying it off, the interest rate on the money that has yet to be paid, and the amount paid per month. The deed states that if the homebuyer breaks the terms of the mortgage loan the financier has the right to claim ownership of the property and sell it to recuperate any financial losses from the loan.

Mortgage deeds are filed in court and can be viewed at a public registry office. A mortgage deed comes to a close either through the borrower paying off the loan, or if the borrower defaults on the loan. When a borrower pays off the loan, the lender files a document called a “satisfaction of a mortgage” which states that they no longer hold interest in the property. If the borrower defaults on the loan agreement in some way, the lender can take possession of the legal title of the property. They may then auction it off or foreclose on the property.

Mortgage deeds and deeds of trust are both documents that protect lenders in the event that a borrower defaults on their loan. Here is an overview of how they differ.

• Structure: A mortgage deed is an agreement between a homebuyer and a lender that allows the bank to effectively hold the title to the borrower’s house. In a deed of trust, a third-party trustee acts on behalf of the lender to ensure that the homebuyer follows the terms of the repayment agreement. Under the terms of a deed of trust, the trustee may hold the title to a homebuyer’s house in escrow until the loan is paid off. The trustee may be an escrow agent, or the employee of a title company.
• Number of parties: A mortgage deed is an agreement between two parties—a borrower and a lender—stipulating the terms of repaying the loan on a piece of property. A deed of trust is a contractual agreement between three parties—the borrower, the lender, and a trustee.
• Foreclosure process: In the event of foreclosure with a mortgage deed, the lender often goes through litigation in order to foreclose on the home if the homebuyer defaults on their loan. Laws vary from state to state, but typically deeds of trust state that the trustee and lender can enact a non-judicial foreclosure, meaning they have the right to begin the foreclosure process without going through the court system. Deeds of trust are typically used in Western states, such as California and Alaska.

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