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Understanding mortgage liens and title theory

Delaware homeowners may be confused about how mortgage loans, liens and property titles work. For example, many people view mortgages as loans made to facilitate the purchase of real estate. However, a mortgage is not technically a loan. Rather, it is an interest in the property, which the lender holds as protection against financial loss should the borrower fail to meet his or her obligation to pay the debt.

Depending on the jurisdiction, there are two forms that a lender's interest in a property can take. In one form, the lender owns the property outright and holds the title. In this situation, the borrower occupies the property as if he or she owns it. When the property is sold initially, the title is transferred from the seller to the lender. The lender will then grant equitable title to the borrower, which allows the borrower to use the property and occupy it. These jurisdictions are known as title theory states. If a borrower defaults on a loan in a title theory jurisdiction, then the lender may step forward and take possession of the real estate.

In the second form, the lender does not take title to a property. It places a mortgage lien on it. Jurisdictions where this occurs are known as lien theory states. Under this scheme, in order to take control of the property after a borrower defaults, the lender must take action in the courts.

A lawyer with a background in real estate transactions may be able explain the differences between title theory and lien theory jurisdictions and might help a client understand which system applies in their case. In addition, a lawyer can review mortgage documents, purchase and sales agreements and any other documents pertaining to a real estate transaction. If there are any errors, omissions or areas of concern, the lawyer could arrange to have those changed or corrected before any legally binding contracts are signed.

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