A mortgage is a legal agreement designed for purchasing homes. In a mortgage, the bank or another creditor lends a borrower money at interest to take the title of the borrower’s property. Mortgages are agreed upon the condition that the conveyance of the title becomes void upon complete repayment of the loan.
Mortgages protect both the seller and the buyer. Mortgages allow the home seller to claim the property if the buyer doesn’t make their payments and they protect the buyer by prohibiting the seller from taking the property while regular payments are being made on it.
When a mortgage is involved in a real estate purchase, it’s essential for the buyer to understand if they are subject to the title theory or the lien theory of mortgages. States either use the title theory or the lien theory, or a modified version called the intermediary theory.
Title Theory vs. Lien Theory vs. Intermediary Theory
When it comes to mortgages, each theory has considerations about who will hold the title and how foreclosures would proceed if necessary.
In title theory states, the borrower does not keep the title to the property during the loan term. The lender has possession of the title and gives the title back to the borrower once the debt is completely paid off. The title possession provides the lender with security. The title is given to the lender through a Deed of Trust and is given back to the borrower through a Deed of Reconveyance. The Deed of Reconveyance removes any interests the lender may have in the property and returns the title to the borrower.
In lien theory states, the borrower possesses the title throughout the period of loan payments. Using the mortgage, the lender places a lien on the property, which is a right to keep possession of property belonging to another person until a debt is paid back.
Foreclosures in Title Theory States vs. Lien Theory States
Foreclosure procedures are different in title theory states and lien theory states. In title theory states, foreclosure proceedings are a judicial process. The lender instigates a title theory foreclosure by filing a foreclosure lawsuit against the borrower. The court will then issue a foreclosure judgment. The property is then liquidated through a foreclosure auction by a designated representative or public official.
In lien theory states, foreclosure proceedings are non-judicial processes handled by a trustee. The original mortgage agreements must include a power-of-sale clause granting the lender to proceed with a non-judicial foreclosure. These types of foreclosures are often resolved quicker than judicial foreclosures.
Intermediary states modified the title and lien theories. In intermediary states, the borrower keeps the title with the expressed agreement that the lender may take back the title if the borrower defaults on the loan.
The intermediary states are:
- New Hampshire
- Rhode Island
Lien Theory States
Twenty-four U.S. states and Puerto Rico are lien theory states. Four states, marked with asterisks, are intermediary states.