Jonathan is a REALTOR® and a former journalist and insurance salesperson. He holds an MA in writing and covers a wide range of financial topics, including real estate, alternative investments, personal finance and more. Jonathan is committed to translating complex industry jargon into a readable, concise format that everyone can understand.
Updated Dec. 2, 2022 Read time 5 minReady To Buy a Home?
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Start My ApplicationReal estate transactions are often chock full of complex terms, complex jargon and complex concepts. Even a question as simple as whether you or not you own your home after closing can result in a not-so-simple answer. (Hint: It depends on which state you live in.)
The answer to the question of ownership may rest in a defeasance clause. A defeasance clause is language that terminates a lender’s property interest once a stipulated condition (full mortgage payoff) has been met.
In your mortgage agreement, a defeasance clause grants homeowners full ownership of their homes by transferring the home’s title once the mortgage is paid off. However, different states have different legal theories as to when that happens and who holds the title to your home.
Though the concepts of mortgage theory and defeasance clauses can seem intimidating at first, you’ll soon understand what these terms mean and why they’re relevant to you as a homeowner.
In real estate, a defeasance clause in a mortgage agreement states that the lender’s claim on the property’s title will be nullified and full ownership will be transferred to the borrower once the terms of the mortgage are fulfilled.
However, defeasance clauses aren’t mandated nationwide. They’re only applicable in title theory states.
For example, if you lived in Texas – a title theory state – and you took out a 15-year fixed-rate mortgage, you’d find a defeasance clause in your mortgage agreement.
After 15 years of making all your monthly mortgage payments, you would have fulfilled all your obligations to the lender. Your last mortgage payment would trigger the defeasance clause. And with the mortgage satisfied, the title would transfer from the lender to you.
If you live in one of the 23 non-title theory states, keep reading to learn whether your state is a lien theory or intermediary theory state and what that means for you.
Mortgage theory determines whether the borrower or lender has ownership over the property. Mortgage theory varies by state, but regardless of which mortgage theory applies to your state, your lender can’t simply take the property away from you unless you fail to make your payments.
However, if you do default on your mortgage payments, repossession by the lender also varies by state.
Three legal theories pertain to mortgages: title theory, lien theory and intermediate theory.
Title theory means that the lender (also known as the mortgagee) keeps the title to the property until the borrower satisfies all the requirements of the mortgage. If you buy a home in a title theory state with a loan, your lender holds the title of the property until you pay off your mortgage.
In lien theory states, the borrower (also known as the mortgagor) keeps the title to the house, but the lender attaches a lien to the property. The lien gives them the right to seize the property if you fail to meet the terms of the mortgage.
If you buy a home in a lien theory state, you hold on to the title as long as you continue making your payments and abide by the terms of your mortgage.
Intermediate theory is a sort of hybrid approach that features elements of both title theory and lien theory. Intermediate theory allows the borrower to retain the title but gives the lender the right to take the title if the borrower defaults on their loan payments.
If you live in an intermediate theory state, you hold the title of your home (like in a lien theory state). But if you default on your payments, your lender can take back ownership of the title (like in a title theory state).
Now that we understand the three theories that designate who retains title to a property, it’s helpful to know which mortgage theory applies to your state. Check out the list below to find out.
A deed of trust is like a mortgage. Neither the borrower nor the lender holds the deed. It’s held by a third-party trustee, such as a title company.
