If you hold a seller-financed note, you have probably encountered the terms "deed of trust" and "mortgage." While both are legal instruments that secure a real estate loan with property as collateral, they work differently in important ways — particularly when it comes to foreclosure and selling your note on the secondary market.
This guide breaks down the differences in plain language and explains why it matters for note holders who may want to sell their note for cash.
The Basics: What Each Document Does
Both a deed of trust and a mortgage serve the same fundamental purpose: they give the lender (or note holder) a security interest in the property. If the borrower stops making payments, the security instrument gives the note holder the right to take the property through foreclosure and sell it to recover the debt.
The difference is in the structure and the process.
Mortgage: Two Parties
A mortgage involves two parties:
- Mortgagor: The borrower (property buyer) who pledges the property as collateral.
- Mortgagee: The lender (note holder) who holds the lien on the property.
In a seller-financing scenario, you (the seller) are the mortgagee. The buyer signs a promissory note promising to pay you, and a mortgage that gives you a lien on the property. The buyer receives the deed and owns the property, but your lien is recorded against the title.
If the buyer defaults, you must go through judicial foreclosure — a court-supervised process. This means filing a lawsuit, getting a judgment, and then selling the property at auction. Depending on the state, this can take 6 to 18 months or longer.
Deed of Trust: Three Parties
A deed of trust involves three parties:
- Trustor: The borrower (property buyer).
- Beneficiary: The lender (note holder) — this is you in a seller-financing transaction.
- Trustee: A neutral third party (typically a title company or attorney) who holds "bare legal title" to the property.
The trustee holds title in trust until the loan is paid in full, at which point they issue a deed of reconveyance transferring full title to the borrower. If the borrower defaults, the trustee can initiate a non-judicial foreclosure — selling the property without going to court.
Non-judicial foreclosure is significantly faster (typically 60-120 days) and less expensive than judicial foreclosure. This is the key advantage for note holders and note buyers.
Side-by-Side Comparison
| Feature | Mortgage | Deed of Trust |
|---|---|---|
| Parties | 2 (borrower + lender) | 3 (borrower + lender + trustee) |
| Foreclosure type | Judicial (court required) | Non-judicial (power of sale) |
| Foreclosure timeline | 6-18 months | 60-120 days |
| Foreclosure cost | Higher (court fees, attorney) | Lower (no court involvement) |
| Right of redemption | Often longer statutory period | Typically shorter or none |
| Deficiency judgment | Generally available | Often restricted or unavailable |
| Who holds title? | Borrower (lender holds lien) | Trustee (in trust for beneficiary) |
| Common states | NY, NJ, FL, IL, OH, CT | TX, CA, CO, AZ, VA, OR, WA |
Which States Use Which?
State law determines whether mortgages or deeds of trust are used. Some states allow either one. Here is a general breakdown:
Deed of trust states (non-judicial foreclosure): Texas, California, Colorado, Arizona, Virginia, Oregon, Washington, Tennessee, Nevada, Idaho, Montana, Utah, Georgia, North Carolina, and others.
Mortgage states (judicial foreclosure): New York, New Jersey, Florida, Illinois, Ohio, Connecticut, Pennsylvania, Massachusetts, and others.
States allowing both: Several states permit either instrument. In these states, the choice is typically made by the closing attorney or title company.
Why This Matters When Selling Your Note
If you are considering selling your note on the secondary market, the security instrument type directly affects pricing:
- Deed of trust notes are generally more valuable because non-judicial foreclosure gives the note buyer a faster, cheaper remedy if the borrower defaults. Faster resolution means lower carrying costs and less risk.
- Mortgage notes may be slightly discounted in judicial foreclosure states because the timeline and cost of default resolution is higher. However, notes with strong payment history and high equity still command good pricing regardless of the instrument type.
- Payment history matters more than instrument type. A performing note with 24 months of on-time payments in a judicial state is worth more than a note with spotty payments in a non-judicial state. The security instrument is one factor among many.
What to Check in Your Documents
Not sure which type you have? Check these things:
- Look at the document title: It will say "Mortgage" or "Deed of Trust" at the top of the first page.
- Count the parties: Two signatures (borrower + lender) = mortgage. Three parties listed (borrower + beneficiary + trustee) = deed of trust.
- Check recording: Both should be recorded with the county recorder or register of deeds. If yours is not recorded, get it recorded immediately — an unrecorded lien can create serious problems.
Can You Sell Either Type?
Yes. Both mortgages and deeds of trust can be sold on the secondary market. Note Buyers of America purchases both types in all 50 states. The selling process is similar for both:
- Submit your note details (including copies of the promissory note and mortgage or deed of trust).
- Receive a cash offer within 24 hours.
- Close through a title company in as few as 21 days.
The transfer mechanism differs slightly — a mortgage is transferred via an assignment of mortgage, while a deed of trust is transferred via an assignment of deed of trust — but both are standard procedures handled by the closing agent.
Bottom Line
Whether you hold a mortgage or a deed of trust, your note is a valuable financial asset that can be converted to cash. Deed of trust notes may command slightly better pricing due to the non-judicial foreclosure advantage, but the most important factors are always payment history, borrower equity, and documentation quality. If you are considering selling your note, contact Note Buyers of America at 800-467-2943 for a free, no-obligation quote within 24 hours.