Title Theory (Legal Definition And What You Should Know)

What is a Title Theory?

What are the title theory states?

What is the difference with the lien theory?

Keep reading as we have gathered exactly the information that you need!

Let’s dig into our mortgage law and real estate knowledge!

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What is the Lien Theory 

In many cases, a person or company looking to purchase a real estate property will need financing from the bank, lender, or financial institution.

When financing is involved in the purchase of a real estate property, it’s important to understand the laws applicable to how a lender may exercise a recourse against the property in the event of default on the mortgage payments or financing agreement.

There are two types of mortgage law theories this matter:

• Lien theory
• Title theory 

Based on the title theory, the bank or lender will keep the title to the property for the duration of the financing term.

For example, if Mary borrows $200,000 to purchase a new home, her lender will keep the title to her home until she pays off the full $200,000 along with all the accrued interest.

When the mortgage is fully paid, the lender will sign a deed of reconveyance to transfer the title of the property to the borrower.

In many cases, the lender will hold the title to the property through a Deed of Trust.

Title Theory definition

The title theory refers to mortgage laws governing the manner lenders, banks and financial institutions can hold security on a real estate property.

According to Cornell Law School’s Legal Information Institute, the title theory is defined as follows:

Based on the title theory, the mortgagee (or lender) will keep the title over the security interest (real estate property).

Title Theory State

What is a title theory state?

What is the title theory state definition?

Every state has its own laws and regulations governing mortgages, liens, and securities granted on a property.

Many wonder:

• Is Texas a lien theory or title theory state?
• Is North Carolina a title theory state?
• Where can I find the title theory states list?
• Which states are title theory states?

In this section, we provide you with the list of the title theory states to answer your questions.

Before we jump into the list, it’s important to note that in title theory states, if a person is buying a new home or entering into a real estate transaction requiring financing, the buyer will not acquire the title to the property immediately.

Instead, the lender will have title to the real estate property until the terms of the mortgage agreement or financing agreement are fully satisfied.

Which states are considered to be title theory states?

The following states follow the title theory principles:

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

Title Theory foreclosure proceedings 

In title theory states, the foreclosure proceedings will require the involvement of the court and the judicial system.

In essence, the property ownership is held by the lender who must initiate a foreclosure lawsuit against the defaulting borrower.

Eventually, the lender will obtain a foreclosure judgment allowing it to enforce its rights against the borrower.

When the borrower does not have the ability to pay back the lender, the lender will use its foreclosure judgment to liquidate the property through a foreclosure auction.

Intermediary theory 

There are some states that follow mortgage laws that are sort of a hybrid of the title theory and the lien theory.

We call them the intermediary theory states.

In essence, in intermediary states, the borrower will be given the title to the property just like lien theory states.

However, the mortgage agreement or financing agreement will have an express provision where the lender can take back the title to the property in the event of the borrower’s default.

Here are the intermediary states:

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

Title theory vs Lien theory

What is the difference between a title theory and lien theory?

In title theory states, the lender retains the title to the property as security for the entire time the borrower has an outstanding mortgage.

In exchange, the lender grants the borrower the right of possession and use of the real estate property.

When the mortgage is paid off, the lender conveys the actual title to the property to the borrower.

However, if the borrower defaults on his or her payments, the lender has the title to the property and can take the necessary legal steps to foreclose the property.

Lien theory means that when a real estate property is purchased using financing, the borrower will acquire full ownership of the property by having the property deed registered in his or her name.

However, to secure the lender’s money and guarantee that the borrower will reimburse the mortgage, the lender will register the mortgage against the property.

In common lingo, we say that the lender places a lien on the property.

When the mortgage is paid off, the lien is extinguished.

If the borrower defaults, the lender can use the lien as a means to foreclose the property and get paid.

Deed of trust 

In title states, the lender will keep the title to the property through a deed of trust. 

As a result, the law allows the lender to have the borrower sign a deed of trust instead of a mortgage.

Under the deed of trust, the borrower will name the lender as the beneficiary of the trust.

Typically, a third party will act as the trustee independent of the lender and borrower.

When the borrower satisfies the terms of the loan agreement, the lender will sign a deed of reconveyance transferring the title of the property from the trust to the borrower.

If the borrower defaults on the loan, then the lender can exercise its rights as the beneficiary of the trust.

Takeaways 

So what does the Title Theory mean?

Let’s look at a summary of our findings.

Title Theory:

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