What Is a Mortgage Lien?
A mortgage is the security that lenders hold in support of a loan for the purchase of real estate. In common conversation, most people conflate mortgages with the actual loans made to purchase the real estate but, strictly speaking, a mortgage is not a loan. Instead, it is an interest in the real property held by the lender as protection in case the borrower should fail to pay back the loan.
This article focuses on mortgage liens. For related articles and resources, see FindLaw's Mortgages and Equity Loans section.
The Mortgage as an Interest
This interest can take one of two forms based on the legal theory that prevails in the underlying jurisdiction. The lender can either own the property outright (but still allow the borrower to occupy the property as if they owned it), or the lender can place a “mortgage lien” on the property. States where lenders possess the title to the property are known as “title theory” states, and states where lenders place mortgage liens on property in lieu of taking title to it are known as “lien 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 while the borrower/mortgagor holds the equitable title. When the sale of the real estate goes through, the seller actually transfers the property to the lender, who 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 simply step in and take possession of the property if a borrower defaults on the loan. Since the lender already technically owns the property, the lender simply revokes the borrower’s equitable title and reclaims the property.
In lien theory states, on the other hand, the borrower takes the legal title to the property while a lender holds a mortgage lien over it. A lien, you may recall, is a non-possessory security interest in a piece of property. In the case of a mortgage lien, it is an interest that a lender holds in real property that does not involve possession, but the property carries the encumbrance of the mortgage lien for the life of the loan.
If the borrower attempts to sell the property before satisfying the debt, the mortgage lien will show up as a cloud on the title. The lien entitles the lender to step in and claim a portion of the proceeds sufficient to satisfy what is left of the loan before releasing the lien, which will clear the title and allow the sale to go forward.
Because the lender in lien theory states does not hold the legal title to property, lenders must go through a judicial process to either take title to the property or force a sale in the event that a borrower defaults on the loan. Talk to a real estate attorney if you have additional questions about mortgage liens.