MortgageA mortgage is the most common home loan arrangement and the one that most people are familiar with. With a mortgage two parties are involved, the homeowner and the bank, and a loan is made directly from the bank to the individual with the home as collateral for the loan.
If payments aren't made the bank can then initiate a foreclosure process, whereby they use the legal system to gain title over the home themselves. The bank would then typically re-sell the home to recover the value of the loan they initially made to the individual. Foreclosure homes are often sold via auction, as the bank want to recover their funds as soon as possible, and this can result in the home being sold at a significant discount.
The key issue with foreclosures is that they can be very time consuming processes, often taking months or even a year to clear the legal system and finally see a resolution. Many states also have mechanisms where the homeowner can get the home back well into the foreclosure process (and even after it's finished) by catching up on their payments. With the time and costs involved banks have been moving towards deed of trust arrangements to address this.
Deed of TrustIn a deed of trust loan arrangement a third party becomes involved, the trustee, who actually holds ownership of the home until the loan is fully repaid. The homeowner is still responsible for making payments to the bank and once they have fully repaid the loan the trustee holding the home in escrow will give it to the individual.
If payments aren't made the bank can then reclaim the home directly from the trustee and avoid the lengthy process of a judicial foreclosure against the individual, as the individual never actually held title to the home. Banks prefer deed of trust arrangements as they can get title to the property and re-sell it far more quickly than if a mortgage was in place, ultimately reducing the administrative and time burden of getting the home sold and cash in their hands.