Explain the difference between title theory and lien theory states.

Question

What will be an ideal response?

Answer 1

In states that have adopted the title theory, when a borrower gives the lender a financing instrument as security for the promise to repay the loan obligation outlined in the promissory note, the title to the real property vests in the lender or in a third party acting as an escrow agent. That third party may be a title company, an escrow company, or a trust company. The borrower retains possession of the real property and remains in possession as long as the borrower conforms to the terms of the loan agreement. When the loan is paid, the legal title to the property then transfers to the borrower.In states that have adopted the lien theory, when the borrower gives the lender a financing instrument, such as a mortgage, as security for the promise to repay the loan obligation, the borrower is only giving the lender a lien on the real property. The borrower obtains legal title to the property. The lender perfects its lien by recording it in the recording office in the county in which the real property is located. The lender, as a lienholder, has the right to enforce this lien should the borrower default by bringing a foreclosure action. The lender may not take possession of the property until the foreclosure action is completed.