Mortgage Concepts & Law


Before we talk about mortgage interest rates or monthly payments, we have to understand the underlying legal philosophy. States generally fall into one of two "camps" regarding who holds the actual title to a property while a loan is being paid off.Title Theory vs. Lien TheoryImagine you buy a car with a loan. In some places, the bank keeps the title in a vault until you pay it off. In others, you keep the title, but the bank puts a "stamp" on it saying you owe them money. Real estate works similarly.Title Theory (The "Bank Holds the Title"):The borrower gives legal title to the lender (or a third-party trustee) and retains only "equitable title" (the right to use and possess the property).If the borrower defaults, the lender can take possession relatively quickly because they already hold the title.Lien Theory (The "Borrower Holds the Title"):The borrower holds the legal title. The lender simply has a recorded lien (a financial claim) against the property. If the borrower defaults, the lender must go through a formal judicial foreclosure process to get the title.Note: Florida is a Lien Theory state.