What Is The Difference Between a Title Theory and a Lien Theory State?

When financing is involved in a real estate purchase, it is important to understand if you will be subject to the title or lien theory of mortgages. The way in which a state will interpret how mortgage law is followed will be determined by which type of theory is practiced in your state.

Each type of theory has special considerations on who will hold title and how foreclosure proceedings would take place if they were to become necessary. In title theory states, the borrower does not actually keep title to the property during the loan term. The seller gives the buyer/borrower a deed to the property but when the borrower signs the mortgage for the loan the borrower gives the title back to the mortgage holder. The lender then holds title to the property, as security only, until all loan payments have been made. During that time the borrower has the right to possession of the property, and the lender delivers the deed back to the borrower only after the loan obligation has been satisfied.

In a lien theory state, the buyer holds the deed to the property during the mortgage term The buyer promises to make all payments to the lender and the mortgage becomes a lien on the property, but title remains with the buyer. The lender's lien is removed once the payment of all loan payments have been completed. Foreclosure proceedings in a lien theory state may be more difficult for the lender than in a title theory state, due to the fact that the buyer is holding title to the land and not the lender.

Georgia is a Title Theory state.