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The theory of lien in the United States plays a fundamental role in many states, offering an alternative perspective to the theory of title in the relationship between borrowers and lenders. Below is an example that illustrates how lien theory works in practice.
What is the Lien Theory?
Unlike the title theory, in states that follow the lien theory, the borrower retains both legal and equitable title to the property when a mortgage loan is made. The lender, on the other hand, obtains a lien against the property, which acts as security for the loan.
Hypothetical Example: Ana's House Purchase
- Property Purchase: Ana decide comprar una casa en un estado de teoría del gravamen. Ella obtiene un préstamo hipotecario de «Banco Confiable».
- Title Retention: Despite having a loan with the bank, Ana retains both legal and equitable title to her new house from the beginning.
- Lender's Lien: «Banco Confiable» no recibe el título de la casa. En cambio, se coloca un gravamen sobre la propiedad que le da al banco el derecho a tomar posesión si Ana no cumple con los términos del préstamo.
Loan Payment and Lien Release
Suppose Anna makes monthly payments for several years and eventually pays off the loan in full.
- Full Loan Payment: Una vez que Ana paga el préstamo en su totalidad, «Banco Confiable» está obligado a liberar el gravamen de la propiedad.
- Release Documentation: El banco emite un documento conocido como «Liberación de Gravamen» o «Satisfacción de Hipoteca», que Ana debe registrar con el registro de la propiedad local.
- Free and Clear Property: Con el gravamen liberado y el registro apropiado, Ana posee su casa libre y clara, sin más obligaciones hacia «Banco Confiable».
Non-compliance: what it means
It is critical for borrowers in lien theory states to understand that although they maintain title to their property, any default on the loan can result in a foreclosure process where the bank can assert its lien and potentially take possession of the property.
In the United States, the laws governing mortgages and real estate ownership can be divided into two main categories: the theory of title and the theory of lien. States that follow the lien theory focus on the fact that the borrower holds title to the property and the lender has a lien on the property as security for the loan.
States that operate under the lien theory are the most common in the United States. Below is a list of some states where the lien theory prevails:
- California: Here, lenders obtain a lien on the property that can be foreclosed if the borrower defaults on the loan.
- Florida: As in California, in Florida, the lender does not hold title to the property but rather a lien that allows them to initiate foreclosure proceedings if necessary.
- NY: This is another example where the borrower retains title and the lender secures it with a lien.
- Texas: Despite being a title state in some respects, it generally follows the lien theory in terms of residential mortgages.
- Illinois: This is a state that strictly follows the lien theory, providing protection to the borrower by holding title to the property.
- Georgia: Although Georgia uses security deeds instead of mortgages, it operates under a variant of the lien theory in practice.
- Pennsylvania: Similar to other lien states, the title remains with the owner while the lender has a lien on the property.
- Ohio: In this state, the same practices apply as in other lien theory states.
It is important to note that mortgage laws can be complex and vary not only between states but also over time due to legislative amendments. Therefore, it is advisable that both lenders and borrowers consult with a real estate attorney in their state to understand the exact implications of lien theory on their specific transactions.
Conclusion
Lien theory offers borrowers a more direct sense of ownership from the beginning of their mortgage loan, underscoring the importance of making timely loan payments to maintain ownership of their home. Through this example, we can appreciate how different legal approaches to ownership and liens reflect the diversity and complexity of real estate laws throughout the United States.
