The Tax Lien Theory and How It Works: An Illustrative Example

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 decides to buy a house in a lien theory state. She obtains a mortgage loan from “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: “Reliable Bank” does not receive the title of the house. Instead, a lien is placed on the property that gives the bank the right to take possession if Ana does not comply with the terms of the loan.

Loan Payment and Lien Release

Suppose Anna makes monthly payments for several years and eventually pays off the loan in full.

  • Full Loan Payment: Once Ana pays the loan in full, “Banco Confiable” is obliged to release the lien on the property.
  • Release Documentation: The bank issues a document known as a “Release of Lien” or “Satisfaction of Mortgage,” which Ana must register with the local property registry.
  • Free and Clear Property: With the lien released and the proper registration, Ana owns her house free and clear, with no further obligations to “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:

  1. California: Here, lenders obtain a lien on the property that can be foreclosed if the borrower defaults on the loan.
  2. 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.
  3. NY: This is another example where the borrower retains title and the lender secures it with a lien.
  4. Texas: Despite being a title state in some respects, it generally follows the lien theory in terms of residential mortgages.
  5. Illinois: This is a state that strictly follows the lien theory, providing protection to the borrower by holding title to the property.
  6. Georgia: Although Georgia uses security deeds instead of mortgages, it operates under a variant of the lien theory in practice.
  7. Pennsylvania: Similar to other lien states, the title remains with the owner while the lender has a lien on the property.
  8. 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.


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.

Legal and Tax Disclaimer

Please be advised that the content presented in this blog is for informational purposes only and should not be construed as legal or tax advice. The articles and information provided here are written from the perspective of a real estate agent affiliated with Keller Williams, and do not represent legal or tax counsel.

As the author, I am a licensed real estate professional under Keller Williams, holding Brokerage DRE License Number: #02197031. However, it is important to note that my expertise is in the field of real estate, and not in legal or tax matters. The insights and opinions shared on this blog are based on my experiences and knowledge in the real estate industry and should be treated as general guidance rather than definitive legal or tax advice.

For specific legal or tax concerns relating to any real estate transactions or investments, readers are strongly encouraged to consult with a qualified attorney or tax advisor who can provide tailored advice based on your individual circumstances and the latest legal and regulatory requirements.

The information on this blog is provided "as is" without warranty of any kind, and I, along with Keller Williams and its affiliates, disclaim all liability for any loss, damage, or misunderstanding arising from reliance on the information contained herein.

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