Racquel is a Real Estate Licensee and holds a New Jersey Title Insurance Producer Certification
Jill and Jenny are identical twins who lead identical lives. They purchased similar homes and received the title (which is a bundle of rights) to their homes at the same time. Although their homes may appear as identical as they do, that's where the similarities end. Jill lives in New York, and Jenny lives in Nevada, which makes their legal rights as homeowners very different.
In the U.S., each state is either a lien theory state, a title theory state, or a combination of the two. The theory is that when a homeowner takes out a mortgage (which is a pledge of property as collateral for a loan), the mortgage becomes a lien on the property's title or the title is held in trust until the loan is paid back.
Jill's house is in New York, which is a lien theory state, so the title to her home belongs solely to her. When she borrowed money to buy her home, she signed a mortgage.
A mortgage is an agreement made between a mortgagor, who is the person getting the loan, like Jill, and a mortgagee who is the creditor providing the loan. In return for the loan, the mortgagor gives the mortgagee a security interest in their title. This secures the mortgagee's rights and creates a voluntary lien against the title.
The lien is voluntary because a mortgagor like Jill wants the mortgage and signed documents agreeing to it. Involuntary liens can also affect the title to someone's home. Involuntary liens are usually the result of a lawsuit. Once Jill pays the loan back, the lien will be removed from her title.
In Jenny's case, her home is located in a title theory state, Nevada, which means that to secure a loan to buy a home, the purchaser has to place his or her title into a trust. Also, instead of signing a mortgage, Jenny signed a deed of trust.
A deed of trust is an agreement between a trustor, like Jenny, and a beneficiary who is the creditor issuing the loan. A trustee is an independent third party who will oversee the trust until the trustor (Jenny) pays the beneficiary (the creditor) back.
If Jill or Jenny fail to pay their loans back, both of them could lose the title to their homes through the legal process of foreclosure.
Judicial & Non-Judicial Foreclosure
In a lien theory state, where Jill lives, if she doesn't pay her loan back, the creditor can enforce their lien against her title. To enforce the lien the creditor can file a lawsuit. If a court of law finds Jill guilty of non-payment, her home would be foreclosed, causing her to lose all rights to the title.
Foreclosures handled through a court are judicial because the court is exercising its judicial authority.
In a title theory state where Jenny lives her rights to her title are already limited until she repays the loan. If she defaults on her agreement, a trustee could bypass a court of law and conduct a foreclosure. The trustee's power comes from a 'power of sale' clause within the deed of trust.
Foreclosures handled by a trustee are non-judicial because they don't involve the jurisdiction of a court.
Satisfaction vs Reconveyance
However, if Jill and Jenny pay their loans back, both of them will get the full rights to their title back, too.
After Jill pays her loan back in a lien theory state, the creditor will remove their right to her title by filing a satisfaction, which is a legal instrument that's recorded at a local county clerk or recorder's office. Recording the satisfaction removes the creditor's right to the title.
In a title theory state, like where Jenny lives, after a loan is repaid the trustee will issue a reconveyance deed. A reconveyance deed is similar to a satisfaction since it must also be recorded at a local county clerks or records office. A reconveyance deed removes a creditor's rights to a title, and the title is then removed from the trust.
In real estate, there are two theories that affect a homeowner's rights: lien theory and title theory. In the U.S. each state views a homeowners rights under either theory or a combination of the two. When someone purchases a home, they receive a title, which is a group of rights to a property.
- In a lien theory state, when someone gets a loan and secures it with a mortgage, it becomes a lien against the title (with a mortgage being an agreement made between a mortgagor and a mortgagee who is the creditor providing the loan).
- In a title theory state, loans are commonly secured by a deed of trust. Remember that a deed of trust is an agreement by the trustor and the beneficiary.
If an owner doesn't repay a loan secured by a mortgage or deed of trust, the creditor who issued the loan can enforce their rights and seize the title. In a lien theory state, creditors can file a lawsuit to foreclose through the court's jurisdiction. In a title theory state, a trustee can bypass the court and handle a foreclosure.
When loans secured by mortgages and deeds of trust are paid back, the creditor's right to the title are removed through the recording of a satisfaction, which is a legal instrument that's recorded at a local county clerk or recorder's office, or a reconveyance deed, which removes a creditor's rights to a title, and the title is then removed from the trust, both of which must be recorded at a local county clerks or records office.
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