How do you find a foreclosure property? You can get fantastic deals if you know how to buy them.
When purchasing a foreclosure or bank-owned property, it is imperative you understand if the property is subject to the title or lien theory of mortgages. Each theory has considerations on who will hold title and how foreclosure proceedings will take place. But before we jump into the two theories, let’s discuss how a mortgage works.
The terms of the mortgage will define the installment schedule will also include an acceleration clause that spells out conditions under which the mortgagee can declare that the entire mortgage balance is due and demandable. Nonpayment of monthly balances over a given period triggers the foreclosure process, which will allow the lender to exercise control over the property and pursue repayment of the loan. The foreclosure process varies from state to state, depending on which set of guidelines for mortgages apply in your state.
Now we are ready to explore the differences between lien theory and title theory in real estate.
LIEN THEORY STATES
In lien theory states, the buyer, who is also the borrower, will hold the deed to the real estate property for the life of the mortgage. The buyer promises to make payments on the mortgage according to the terms spelled out in the financing agreement. The mortgage agreement serves as the lender’s lien on the property until the loan is paid back completely, but the buyer holds the title to the property instead of the lender. The lien is extinguished when the loan is paid off in full.
These are the states where mortgage laws are defined by lien theory:
Arkansas
Connecticut
Delaware
Florida
Hawaii*
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland*
New Mexico
New York
North Dakota
Ohio
Oklahoma*
New Jersey
Pennsylvania
Puerto Rico
Rhode Island*
South Carolina
Vermont*
Wisconsin
TITLE THEORY STATES
In these jurisdictions lender conveys the title to the buyer who will then issue a Deed of Trust naming the lender or mortgagee as the beneficiary of the trust. The title to the property is held by a third party trustee who is given the power to foreclose should buyer fail to comply with the terms of the mortgage agreement. Rights of ownership and possession reside with the buyer according to the terms of the Deed of Trust. When the loan is completely satisfied, the lender issues and records a Deed of Reconveyance in favor of the borrower who will now have clear title to the property. The Deed of Reconveyance removes any interests that the lender may have in the property.
These are the title theory states:
Alabama*
Alaska
Arizona
California
Colorado
Washington D.C.
Georgia
Idaho
Massachusetts*
Michigan*
Minnesota*
Mississippi
Missouri
Montana*
Nebraska
Nevada
New Hampshire*
North Carolina
Oregon
South Dakota
Tennessee
Texas
Utah
Virginia
Washington State
West Virginia
Wyoming
A modified version of title and lien theories may also be used as the basis of evaluating mortgage laws. In intermediary theory states, the borrower retains the title with the express agreement that the lender can take back the title when the borrower defaults on the loan. States with an asterisk in both lists provided above are intermediary states.
DIFFERENCES IN FORECLOSURE PROCEEDINGS
Interpretation of mortgage laws depends on whether the state is classified as a lien or title theory jurisdiction. In most cases, mortgage agreements will include due-on-sale or due-on-encumbrance clauses to prevent the transfer of mortgages to a party other than the buyer involved in the original financing contract.
These escalation clauses are triggered by certain events such as the sale of the property or borrower’s failure to comply with the payment schedule. In states that subscribe to title theories where property ownership is held by the lender, foreclosures will require a judicial process. Generally, a judicial foreclosure is instigated after the lender files a foreclosure lawsuit and the court issues a foreclosure judgment against the borrower. The security property is liquidated through a foreclosure auction handled by a public official or a designated representative, such as Auction.com. Before the internet, foreclosure auctions were only held on the courthouse steps with the sheriff taking a lead role in managing the auction. These auctions were also referred to as sheriff’s sales.
Foreclosure proceedings in lien theory states are managed by a trustee. The non-judicial process is often resolved sooner than judicial foreclosures. Most non-judicial foreclosures are handled without any interaction with the courts. However, it is important to note that the original mortgage agreement should include the power-of-sale clause, which grants the lender the right to proceed with a non-judicial foreclosure.