Foreclosures in Title Theory States and Lien Theory States

by staff on September 28, 2012

At this time the national backlog of foreclosed properties inventory is being handled more quickly by lenders in Title theory states.  At the bottom is a diagram of the states for reference. 

Virginia is a Title theory state.   However, some of our neighboring states such as Maryland or Pennsylvania operate as Lien theory states. 

But you might be asking…. what’s the difference?    In practicality there isn’t much difference, but the big difference is how the borrower’s rights are determined in the event of a default on the loan.

In a Title theory state such as Virginia, the lending institution holds the title as long as there is a mortgage on the property.  It’s held by the lender by way of a third-party Deed of Trust.  If a foreclosure happens in a Title theory state, the process is considered non-judicial, in that the lender already has legal title so there is no foreclosure.  The borrower has what’s known as Equitable title for his use of the property.  A Virginian’s legal rights during a loan default somewhat modify the strict Title theory, because the lender must follow procedures to end the borrower’s rights to the property.  A Virginia foreclosure can be judicial or non-judicial.

In a Lien theory state, the loan is considered a lien on the borrower’s title to the financed property.  No Deed of Trust exists between borrower and lender in a Lien theory state, and the borrower holds legal and equitable title to the financed property.  In Lien theory states,  judicial foreclosure procedures must be followed.

Title Theory and Lien Theory States

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