Title Theory States 2024

When purchasing a home or property, it is often helpful to know the title transfer rules followed by the state in which the home/property is located. Mortgage laws divide states into three categories: title theory states, lien theory states, or intermediary theory states. The most important difference between the three is who holds the property's title (and the bulk of the legal rights) while the buyer is paying off the loan.

Most buyers lack the financial wherewithal to purchase a home or property outright. Instead, the buyer takes out a loan from a bank or mortgage lender. The buyer uses the loaned money to pay the seller, then repays the loan over a number of years by making monthly payments (with interest) to the lender.

Once the loan is paid in full, the buyer becomes the undisputed owner of the home. But until that time, the questions of who holds the property title—and what rights they have in the event of a default—are answered by title theory, lien theory, and intermediary theory.

Title Theory vs. Lien Theory vs Intermediary Theory

Title theory, lien theory, and intermediary theory determine how mortgage law is followed in each state. Each theory establishes different rules about who will hold the title during the lifetime of the loan and how foreclosure proceedings would occur if necessary.

Title Theory states

In title theory states, the property title is held by the lender until the buyer's loan is fully repaid. Typically, a document known as a Deed of Trust is used to convey the title to the lender (by establishing a legal trust, which holds the title). Later, once the loan is completely paid off, the lender issues a Deed of Reconveyance, which removes any rights the lender may have to the property and transfers the title to the buyer/borrower.

Even though the lender holds the title in title theory states, the buyer still has full rights to possess, modify, and (if applicable) reside at the property during the repayment period. However, if they fail to make payments or default on some other aspect of the loan, the lender can usually foreclose on the loan without involving the judicial system.

As of 2023, 19 (arguably 20) U.S. states and the District of Columbia use title theory:

* There exists considerable debate as to whether California is title theory or lien theory state. While many mortgage law experts consider it a title theory state, 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." It is listed here for the sake of inclusion.

** Utah's status as a title theory state is debatable. Utah state code includes conflicting statutes on mortgage law, and legal cases attempting to resolve these statutes have come to differing conclusions as to whether the state follows lien theory or title theory.

Lien theory states

In lien theory states, the property title is held by the buyer/borrower. The lender is instead granted a lien on the property. A lien is a right to take possession of property belonging to another person until a debt owed is paid. The lender may still foreclose on the loan if the buyer fails to satisfy the loan's terms (for instance, by falling behind on payments). However, the foreclosure process is more elaborate, time-consuming, and expensive, and typically requires the lender to file a foreclosure lawsuit, which may be legally contested by the borrower/buyer.

Intermediary theory states

Intermediary states blend elements of lien and title theory. In most intermediary states, the buyer/borrower holds the title as they would in lien theory states, but the lender has specific legal permissions that make it easier to foreclose in the event of a loan default, as in title theory states.

Foreclosures in Title Theory States vs. Lien Theory States

AS outlined in the descriptions above, foreclosure proceedings differ depending on the state in which a transaction takes place and whether it is a title theory state, a lien theory state, or an intermediary theory state.

In title theory states, foreclosure proceedings are usually non-judicial and handled by a trustee. These are often resolved more quickly than judicial foreclosures. The original mortgage agreement often includes a power-of-sale clause, which grants the lender the ability to proceed with a non-judicial foreclosure in the event that the buyer/borrower defaults on the loan.

In lien theory states, foreclosures usually require a judicial process, which adds time, cost, and complexity. Judicial foreclosures are typically instigated after the lender files a foreclosure lawsuit, and the court issues a foreclosure judgment against the borrower. The property is then liquidated through a foreclosure auction by a designated representative or public official.

Foreclosure proceedings in intermediary states can vary greatly depending upon each state's specific arrangement. As a rule, however, they are typically easier than in lien theory states, if not quite as straightforward as foreclosures in title theory states.