Difference Between Mortgage and Deed Of Trust For Note Investors
You’ll hear the terms “mortgage” and “deed of trust” in note investing, but even when buying any type of house.
Similarities Between Mortgages & Deeds Of Trust
A mortgage and a deed of trust are essentially the same document. The name to use just depends on the state where the house is located, and whether it is a judicial foreclosure state or a non-judicial foreclosure state.
Example – California is a non-judicial foreclosure state, and our document is called a “deed of trust”. Ohio is a judicial foreclosure state, so their document is referred to as a “mortgage”. Those two documents are essentially the same thing. They just have different titles based on the state and the foreclosure style.
So, What is a Mortgage or Deed of Trust?
It is a binding document that ties the promise to pay (the Promissory Note) to the securing collateral (the house). This term is not only used in note investing (buying the debt secured by the house) but also when buying an actual house or piece of real estate..
In note investing, the notes are secured by a house or a building. How I tie the house or building to the promise to pay is through the document called a mortgage or a deed of trust.
When you go to the bank and you get a loan to buy your house, you’re going to be signing two different documents.
One is the Promissory Note (your promise to pay). Some characteristics of the Note are:
- it is an unrecorded document
- it will list out all of the terms that you have agreed to (how you are going to repay the bank)
- it details the interest rate and the length of time for the loan (i.e. 15 years, 30 years, etc.)
- It will give detail your monthly principal and interest payment (also known as a P & I payment)
- it lists who the borrower is (you) and who the lender is (the bank)
- it lists other legal terms
The Mortgage or the Deed of Trust (aka Trust Deed).
This document is the document that secures the bank’s position. It’s the document that ties the collateral (the house or the building) to your promise to pay. Some characteristics of the Mortgage or Deed of Trust are:
- it is a recorded document
- it is the document that allows the bank to take your house if you stop paying
- it will list out all of the terms that you have agreed to (how you are going to repay the bank)
- it details the interest rate and, the length of time for the loan (i.e. 15 years, 30 years, etc.)
- It will give detail your monthly principal and interest payment (also known as a P & I payment)
- it lists who the borrower is (you) and who the lender is (the bank)
- it lists other legal terms
In Note investing, it is essential that you have both the Promissory Note (an unrecorded document) and the Mortgage or the Deed of Trust (a recorded document), collectively referred to as notes, in your collateral file.
What Happens If You Are Missing One?
If you just have the Note, but not the Mortgage or Deed of Trust, then your loan is UNSECURED! That means that there is nothing attached to the promise to pay (no security). And we, of course, want to always be SECURED! 😉
If you are a private lender, and you are lending to somebody to fix and flip a property, you need to ensure they have signed both the Promissory Note, AND the Mortgage or the Deed of Trust, to attach the house to the promise to pay. If you don’t, and your borrower stops paying you, you have to take them to court by filing a lawsuit against the borrower in the hope that you will get a judgment to force them to pay.
Then you will have to file a writ of execution to enforce your judgment. Its a long drawn out, expensive process, and there is a very real possibility that you will never get your money back, even if you have a judgment against your borrower.. You cannot just file a foreclosure and take the house as payment for your loan.
If you have secured your position, meaning you’ve secured that Promissory Note with collateral (the house or building) via a Mortgage or a Deed of Trust, then you can follow the foreclosure process in your state, and foreclose on that property to recoup your funds. So if your borrower stops paying, you have something tangible to go after, which gives you security in your investment.
You always want to protect your Ass-ets, right?!?
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