Title theory
National Real Estate Exam glossary · Financing
Definition
The view, followed in some states, that a mortgage conveys legal title to the lender, who holds it until the debt is satisfied, leaving the borrower with equitable title and possession. It contrasts with lien theory, under which the borrower keeps title and the lender holds only a lien.
Title theory in plain English
When you borrow money to buy a home, states disagree about who technically 'owns' it until you finish paying. In a title-theory state, the lender legally holds the title (the ownership paperwork) the whole time you're paying off the loan — you get to live there and you get full ownership the moment the debt is cleared. Think of it like a rent-to-own where the store keeps the receipt in its name until your last payment. This is the opposite of a lien-theory state, where you own the title from day one and the lender just has a claim (a lien) it can enforce if you stop paying.
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