Non-Judicial vs. Judicial Foreclosure

Most people use the terms mortgage and deed of trust interchangeably, or rarely use "deed of trust" at all.

However, in fourteen states, including California, mortgages are rarely used.

There are big differences between the two types of security interests. The major distinction is that foreclosure with a Deed of Trust is non-judicial while a foreclosure with a mortgage is judicial.

A mortgage is a two-party transaction. The lender, known as the mortgagee, places a lien on your house. It accepts the mortgage from you, the mortgagor, in exchange for loaning money to purchase your home. If you default, the lender needs to file a lawsuit (judicial foreclosure) to obtain a judgment, which makes the process lengthy, expensive and cumbersome.

Unlike a mortgage, a deed of trust is a three-party transaction. The three parties are the beneficiary, the trustor, and the trustee. The lender is called the beneficiary because it benefits from the transaction by collecting interest. You are the trustor because you are "trusted" with the money. The final party is the trustee, who holds title for the benefit of the beneficiary. The trustee's sole function is to initiate the foreclosure at the behest of the lender.

What happens If I default?

If you default, the trustee follows procedures agreed to in the Deed of Trust, and does not need to involve the court. This is called a Non-Judicial Foreclosure.

In some states, the lender may elect to file a lawsuit instead of following the Deed of Trust procedure. Why would the lender want to follow the more cumbersome mortgage procedure?

In most states, judicial proceedings allows the lender to sue you for any money still owed to it if the auction does not bring enough money to pay off the loan.

This is the big advantage of a deed of trust for the borrower. If the lender forecloses and does not get enough from auction to pay off the promissory note, it cannot sue you for the difference. This is known as the antideficiency rule.

If you default on a deed of trust, only your house is at risk if the lender elects not to file an action in court. The lender cannot go against your other assets or your wages. If you default on a mortgage you are liable for any deficiency after the auction.

With a deed of trust, your house is sold by a trustee's sale. After a trustee's sale the homeowner in most states does not have the right of redemption. This is the right to buy your house back from the purchaser.

The deed of trust gives the lender more rights, such as the right to collect rents from your property if you default.