A mortgage lien is a legal right the lender has to take your property if you fail to pay your debt. In common conversation, most people mix mortgages with the actual loans made to purchase the real estate. But, strictly speaking, a mortgage is not simply a loan. Instead, it is an interest in the real property held by the lender (lienholder) as protection in case the borrower fails to pay back the loan.Â
This article focuses on mortgage liens. For related articles and resources, see FindLaw's Mortgages and Equity Loans section.
A mortgage interest can take one of two forms depending on which state you live in. The lender can either own the property outright (but still allow you to occupy the property as if you owned it), or the lender can place a “mortgage lien†on the property.
States where lenders (mortgagees) possess the title to the property are known as “title theory†states. And states where lenders place mortgage liens on the property are known as “lien theory†states.
In title theory states, a lender holds the actual legal title to a piece of real estate for the life of the loan while the borrower/mortgagor holds the equitable title. When the sale of the real estate goes through, the seller actually transfers the property to the lender. The lender then grants equitable title to the borrower. This means that the borrower can occupy and use the property, but the lender has legal ownership over it.
In title theory states, a lender can simply step in and take possession of the property if a borrower defaults on the loan. Since the lender is technically the property owner, the lender simply revokes the borrower’s equitable title and takes the property.
In lien theory states, the borrower takes the legal title to the property while a lender holds a mortgage lien over it. A lien, you may recall, is a non-possessory security interest in a piece of property. In the case of a mortgage lien, it is an interest that a lender holds in real property that does not involve possession, but the property carries the burden of the mortgage lien for the life of the loan.
If the borrower attempts to sell the property before satisfying the debt, the mortgage lien will show in a title search as a cloud on the title. The lien allows the lender to step in and claim a portion of the income enough to satisfy what is left of the loan before releasing the lien, which will clear the title and allow the sale to go forward.
Lenders in lien theory states don't hold the legal title to the property. They must go through a judicial process to either take title to the property or force a sale in the event that a borrower defaults on the loan. If you have questions about mortgage liens, or would like to learn more about real estate laws in your state, it's best to speak to a skilled real estate attorney near you today.
