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What Is a Mortgage Lien?

Woman signing a mortgage lien document with a gavel next to her.

A mortgage lien is a legal right a lender has to take your property if you fail to pay your debt. In common conversation, most people mix mortgages with simple loan arrangements, but a mortgage is not simply a loan.

It is an interest in the real property the lender (lienholder) holds as protection of the borrower fails to repay the loan. As a creditor, the lender has a legal claim against the homeowner’s property.

Other types of liens include judgment liens, mechanic’s liens, and IRS federal tax liens. Like property tax liens, all of these types of encumbrances can affect your real estate and property title.

This article focuses on mortgage loan liens. For related articles and resources, see FindLaw's Mortgages and Equity Loans FAQ section.

The Mortgage as an Interest

Borrowed money often plays a central role in the home sale or home-buying process. A borrower will owe an outstanding debt to a bank that charges interest rates on the repayment. While the borrower is on a payment plan, the lender retains a mortgage interest against their property.

A mortgage interest can take one of two forms depending on which state you live in. The lender can either:

  • Own the property outright, but still allow you to occupy the property as if you owned it
  • Place a mortgage lien on the property

Some states, where lenders (mortgagees) possess the title to the property, are known as title theory states. All other states, where lenders place mortgage liens on the property, are known as lien theory states.

You may accrue outstanding debt to your mortgage lender as a result of:

  • Refinancing your home to reduce or change your mortgage payments
  • Refinances done to balance your personal finances in general
  • Borrowing against your home to buy personal property (i.e. getting a home equity loan)
  • Consolidating credit card debt or personal loans with your mortgage debt to improve your credit score
  • Taking out a second mortgage for home improvement or renovations

If you have multiple mortgages on your home, they will be subject to a lien priority. Suppose you're having financial difficulties and all of the following happen:

  • A court rules that your home must be sold in foreclosure
  • You're delinquent on your income taxes
  • You've defaulted on your condo mortgage payments
  • Your condo’s homeowners association (HOA) has a lien against your home for not paying HOA dues

When the court moves to foreclose, who gets paid first? Your lender may receive lien priority over the other liens depending on lien priority. Federal and state laws will affect how this priority is set.

See our article on property deeds for information on the differences between a:

Remember that a lender maintains a property interest against your real estate. This is to protect the lender against default while the loan is still being repaid.

Below, we discuss the two ways in which lenders hold property interest across the fifty states in America.

Title Theory States

In title theory states, a lender holds the actual legal title to a piece of real estate for the life of the loan. The public record will reflect their legal title while the borrower/mortgagor holds the equitable title.

When the sale of the real estate goes through, the seller transfers the property to the lender. The lender then grants equitable title to the borrower. This means that the borrower can occupy and use the property, but the lender has legal ownership over it.

In title theory states, a lender can step in and take possession of the property if a borrower defaults on the loan. Since the lender is technically the property owner, the lender revokes the borrower's equitable title and takes the property.

Lien Theory States

In lien theory states, the borrower takes the legal title to the property while a lender holds a mortgage lien over it. A lien is a non-possessory security interest in a piece of property.

In the case of a mortgage lien, it's an interest that a lender holds in real property that does not involve possession. The property carries the burden of the mortgage lien for the life of the loan. The borrower doesn’t get a clear title until the loan is paid off.

If the borrower attempts to sell the property before satisfying the debt, the mortgage lien will show in a title search as a cloud on the title. This is something title companies will be quick to pick up on during sales.

The lien allows the lender to step in and claim a portion of the sale proceeds enough to satisfy what is left of the loan before releasing the lien. Releasing the lien will clear the title and allow the sale to go forward.

Lenders in lien theory states don't hold the legal title to the property. They must go through a judicial process to either take title to the property or force a sale if a borrower defaults on the loan.

Learn More About Mortgage Liens From an Attorney

If you have questions about mortgage liens or would like to learn more about real estate laws in your state, it's best to speak to a skilled real estate attorney near you today.

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