Lien Theory of Mortgages

Lien Theory of Mortgages
••• Jupiterimages/Pixland/Getty Images

Depending on where you live, the concept of "lien theory" ownership might apply to you if your home is mortgaged. The distinction might not affect you if you always make your mortgage payments on time, but if you run into difficulty and you face foreclosure, there are some important differences between lien theory states and those that recognize title theory ownership.

The Lien

As the name suggests, in lien theory states, the lien is the primary protection that the lender has in the event you default. Your lender files a lien with your county clerk or recorder so you can't sell your property with clear title until you satisfy the loan. The mortgage document is a legal acknowledgment that you borrowed a certain amount of money, that you owe that money, and that your lender has a security interest in your property until you repay the loan in full.


In lien theory states, title to your home remains in your name. You're the legal owner of the real estate. In title theory states, by contrast, the situation is similar to what happens when you finance an automobile. Your lender typically takes title to the home until you pay the loan off, then it transfers the title to you. Until that time, if you default on the loan, the lender can foreclose easily – in a sense, the lender already owns the home, so it can take possession back from you without fuss. Lien theory ownership is the exact opposite of this practice, and this is its most important distinction: it's harder to foreclose, because you are the owner of the home.


In a lien theory state, because you hold title to the home, your lender can't just knock on your door, demand your keys, and tell you to leave if you run into financial trouble and miss some payments. It must first petition the court for permission to use the mortgage lien against your property to foreclose. Without court permission, your lender is powerless to take the home. This is a "judicial" foreclosure, and it's more time-consuming and expensive for the lender than the procedure in place in title theory states. This typically gives you, the borrower, more time to remedy whatever problem caused you to fall behind with the mortgage payments.

Overlapping Laws

If you live in a title theory state – and there are only nine of them: Alabama, Georgia, Maine, Maryland, Mississippi, Pennsylvania, Rhode Island, Tennessee and Vermont – title to your property goes to your lender as soon as you sign the loan agreement. You reserve the right to live in your home and enjoy the use of it, but your lender actually owns it until you pay off the mortgage. This means your lender can foreclose on you – just as an auto lender can repossess a vehicle – without involving the court. This is a "non-judicial" foreclosure, but non-judicial foreclosures can occur in other states as well. For example, California is a lien theory state, but it allows for non-judicial foreclosures because it recognizes deeds of trusts, not mortgages, which are held by a third party until the loan is paid off. The bottom line is that laws vary widely among states, and it's wise to research the specific laws and practices in your jurisdiction.