Every state has different laws governing real estate and mortgage law. In lean theory states, banks or whoever is the mortgage lender never has the title to the property. In states that practice title theory, the mortgage lender holds the title of the property until the mortgage is paid off.

What is Lien Theory?

Lien theory is when lenders do not retain the title to a property.

Rather, the lender places a lien against the property. The deed stays with the borrower, and there is a mortgage lien placed by the lender on the property. At the time the debt is paid, the lien is removed from the real property.

What is Title Theory?

Title Theory is when mortgage lenders hold the title of the property until the debt against the property is paid in full.

Using a Deed of Trust the lender holds the title of the property in the name of the borrower. At the end of the loan term and the debt is paid, the lender creates a clear title for the property with a Deed of Reconveyance.

What is Intermediary Theory?

Intermediary Theory is when the borrower holds the title of the property, but the lender (financial institution) can take the title of the real estate property if the borrower defaults on the loan. This is without judicial proceedings and makes things easier on the lender.

What is the Difference Between Lien Theory and Title Theory?

The title is held by the lender in title theory, and in lien theory, the lender places a lien on the property that is being borrowed against.

On top of how title is held, the current practice of the foreclosure process is the biggest difference in lien and title theory. Typically, lien theory states a foreclosure occurs through the judicial system, normally a foreclosure lawsuit. Title theory states foreclosure happens through a non-judicial proceeding like being handled by a trustee. To simplify, lien theory foreclosure proceedings are judicial, while title theory states have non-judicial foreclosures.

What States are Lien Theory States?

The following are classified as a lien state and practice lien theories for the mortgage holder:

• Arkansas
• Connecticut
• Delaware
• Florida
• Illinois
• Indiana
• Iowa
• Kansas
• Kentucky
• Louisiana
• Maine
• New Mexico
• New York
• North Dakota
• Ohio
• New Jersey
• Pennsylvania
• South Carolina
• Wisconsin

When a state practices lien theory that means that instead of the lender holding the actual legal title of the property as an assurance that the loan will be paid in full, the lender takes out a lien on the property.

What States are Title Theory States?

The following are classified as title states and have real estate laws that are defined by title theory:

• Alaska
• Arizona
• California
• Colorado
• Washington D.C.
• Georgia
• Idaho
• Mississippi
• Missouri
• Nebraska
• Nevada
• North Carolina
• Oregon
• South Dakota
• Tennessee
• Texas
• Utah
• Virginia
• Washington
• West Virginia
• Wyoming

When a state practices title theory that means that instead of the lender taking out a lien against the property as an assurance that the loan will be paid until the end of the mortgage payments, the lender holds the actual title of the property. If you are getting a mortgage in a title theory state, you will most likely get a defeasance clause added to your mortgage.

What States are Intermediary Theory States?

The following states have mortgage laws based on the intermediary theory that all real estate transactions with a mortgage must abide by:

• Alabama
• Hawaii
• Maryland
• Massachusetts
• Michigan
• Minnesota
• Montana
• New Hampshire
• Oklahoma
• Rhode Island
• Vermont

In intermediary theory states instead of the lender taking out a lien against the property as an assurance that the loan will be paid in full or holding the title of the property, the borrower signs an agreement that the title goes to the lender if the borrower defaults on their loan. Some may refer to this as intermediate theory, but it is normally known as intermediary theory.

Final Thoughts

Depending on the state you live in, you may be subject to title-theory state, lien theory of mortgages, or intermediary theory. Make sure to research the particular real estate and mortgage laws in your city, county, and state so you aren’t caught off guard and wind up with lender issues or any other issue when investing in the best investment, real estate.

The mortgage process and buying a home can be long and arduous, but it doesn't have to be. Learning about lien and title theory is a small piece of the puzzle, but make sure to read through our guide on what to expect during the escrow process.

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