Lien Theory States 2024

Lien theory states are states whose mortgage laws follow lien theory, which guides the title transfers of purchased properties. Lien theory states are different from title theory states and intermediary states because the title/deed of a purchased property is held by a different entity during the lifetime of the loan.

When buyers wish to purchase a home or property, they typically obtain a loan from a bank or mortgage lender. The loan is used to pay the seller of the home or property, and the buyer then repays the lender in monthly installments (with interest) over a number of years. When the loan is fully repaid, the buyer becomes the undisputed owner. But until that time, the matter of who holds the property title—and what rights they have in the event of a default on the loan—depends upon whether the state follows title theory, lien theory, or intermediary theory.

Title Theory vs. Lien Theory vs. Intermediary Theory

Title theory, lien theory, and intermediary theory each establish different rules about who will hold the title during the lifetime of the loan, as well as how a foreclosure would proceed if necessary.

Lien Theory States

In lien theory states, the title of the property is transferred to the buyer/borrower as part of the purchase process. The lender is then granted a lien on the property, which gives them the right to take possession of the property in the event that the buyer defaults on their loan (usually by failing to make payments).

The foreclosure process in lien theory states is arduous, and usually requires considerable time, money, and legal paperwork. Most foreclosures require the lender to file a foreclosure lawsuit, which the buyer can legally challenge.

As of 2023, 29 states (arguably 20) and Puerto Rico adhered to lien theory.

* Whether California is a title theory or lien theory state is a matter of some debate. Many experts in mortgage law consider California a title theory state—however, Section 5 of the California Department of Real Estate's reference book states "It is settled law that California is a 'lien' and not a 'legal title' theory state when imposing encumbrances/liens against the title of real property." As such, it is listed here as a lien state.

Title Theory States

In title theory states, the title to a purchased property is held not by the buyer, but by the lender. The title is given to the lender through a Deed of Trust when the loan is signed, and is returned to the borrower through a Deed of Reconveyance once the loan (and any interest) is fully repaid. Although the lender holds the title during the repayment period, this is only a financial safety measure. The buyer may still occupy, remodel, and otherwise alter the property as they see fit.

Foreclosures in title theory states are more straightforward, and can typically be completed extrajudicially, with no need to file a lawsuit or involve the courts in any way.

Intermediary Theory States

Intermediary theory states blend elements of title theory and lien theory. In intermediary states, the buyer/borrower holds the title, but with the express agreement that the lender may take back the title if the borrower defaults on the loan.

Foreclosures in Title Theory States vs. Lien Theory States

As mentioned above, foreclosure procedures are different in lien theory states than in title theory states or intermediary theory states. In lien theory states, foreclosure proceedings are a judicial process. The lender instigates a foreclosure by filing a foreclosure lawsuit against the borrower. The court may then issue a foreclosure judgment, after which the property may be liquidated through a foreclosure auction by a designated representative or public official.

In title theory states, on the other hand, foreclosure proceedings are non-judicial processes typically handled by a trustee. The original mortgage agreements typically include a power-of-sale clause, which grants the lender to proceed with a non-judicial foreclosure. These types of foreclosures are often resolved more quickly than the judicial foreclosures required by lien theory states.