Lien theory
National Real Estate Exam glossary · Financing
Definition
The view, followed in many states, that a mortgage merely creates a lien on the property while the borrower retains both legal and equitable title. Contrast title theory, under which the lender holds legal title until the debt is paid. The distinction affects the lender's rights on default.
Lien theory in plain English
When you 'own' a home you bought with a loan, who actually holds the ownership paperwork until you finish paying? States answer this two ways. In a lien-theory state, YOU own the home outright the whole time — the lender just has a lien (a claim) on it as a safety net if you stop paying. This matters most if you default: it changes how the lender has to go about taking the house back, versus a 'title-theory' state where the lender technically holds ownership until your last payment clears.
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