If I Have a Mortgage, Who Really Holds the Title to My Home?

A home buyer who uses financing — as most people do — is considered a homeowner, as opposed to a renter.

The buyer has paid the seller, so the buyer owns the home, regardless of whether the deal is done with cash or financed. If the property’s value rises (or falls), then the gain (or loss) is the buyer’s. the buyer pays the property taxes. The buyer can make alterations (within the limits of zoning or homeowners’ association rules). The buyer doesn’t need the lender’s approval to refresh the kitchen, replace the roof, or put in a native garden.

Granted, a homeowner has to keep an insurance policy on the home; the lender will insist on it. And if the borrower ever stops repaying the loan, the lender has the right to the value of the home that’s collateral for the debt.

In short, the buyer is a homeowner who must adhere to the terms of the mortgage. All of that acknowledged, different states have different laws on who holds the deed. Let’s check ‘em out.

Simple Answer, If You Buy a Home in a “Mortgage State”

Some states use standard mortgage agreements. In these states, the buyers do actually hold their titles. This means a homeowner will keep the title in a drawer or file cabinet, along with the rest of the household’s property documents. The lender does not hold the home’s title during the term of the mortgage.

The mortgage company is merely lending money, so it records a lien to show its claim in case of a borrower’s default. To use the fancy legal language, states that use mortgage liens are based on the lien theory of law.

Once the borrower fully pays off the loan, a deed of release goes into the public record, attesting to the mortgage satisfaction and officially releasing the lien.

Here’s the good part about this whole set-up, from a borrower’s point of view. If the borrower becomes unable to pay the mortgage, the lender has to undertake a judicial foreclosure to take over the property. This gives a borrower the right to a day in court. Only with the court’s approval may a home be auctioned off by the lender.  

States that use mortgage agreements do this because they’re following in the footsteps of the lawyers who argued, in an 18^th-century South Carolina courtroom, that a court’s approval should be necessary before a lender acquires the title to someone’s home. North Carolina might be “first in flight” but South Carolina is first in mortgage law!

Look here to see if the home you’re buying is located in a mortgage state.

Here’s How It’s Different in a “Deed of Trust State”

The states that use deeds of trust are the ones that didn’t adopt South Carolina’s reform. In these so-called title theory states, the title sits in a trust on behalf of the lender. Escrow companies manage these trusts.  

What is title theory? It means the lender retains title rights. Meanwhile, the borrower has the right to use the home.

A deed of trust names the borrower, lender, and a trustee. The trustee holds the title as long as there’s a loan on the property. So, the legal owner of the home is the lender.  

Even so, the borrower is known as a homeowner. It’s just that the title isn’t among the buyer’s loan documents at closing. Only after the very last mortgage payment will the trustee release the title to the homeowner. That final and complete pay-off is called mortgage satisfaction. It triggers defeasance. Look for a defeasance clause in your loan documents. The clause means the lender holds onto the home’s title for the duration of the home loan.

At this point, generally within three weeks (check the requirements under the state’s law) the lender signs and notarizes a deed of reconveyance, passing title to the homeowner, free and clear.

Look here to see if the home you’re buying is in one of the deed of trust states.

In Deed of Trust States, Lenders Have an Edge Over the Borrowers

What’s the edge? Imagine a struggling borrower, who stops paying off the loan balance at some point. The loan account goes into default. Because the lender has access to the title through the trust, the lender need not go to court before reclaiming the title from the escrow company and auctioning the home off.

The lender submits proof of the borrower’s default to the trustee, and requests a foreclosure proceeding. If the borrower misses the lender’s final call to resolve the debt, the trustee takes control of the title, and the loan, and auctions the property to recoup the lender’s outstanding funds.

This is what’s known as non-judicial foreclosure. The procedures are laid out by state law. The law will say how much time the borrower gets to resolve the default before receiving notice of a trustee sale. Notice of the sale will be publicly recorded. It will be printed in the local legal newspaper.

Unlike with a regular mortgage, the borrower won’t be called to appear in court. A judge won’t hear the struggling borrower’s story.

At auction, the trustee will convey ownership to a bidder with a trustee’s deed. Sale proceeds will resolve the lender’s balance, if possible.

As you can see, a deed of trust in place of a mortgage is the lender’s preference. Meanwhile, a buyer is in a somewhat stronger position with a regular mortgage.

In hybrid or “intermediary” states, preference matters, because the parties have options. Yes, some states allow either a mortgage or a deed of trust in home financing transactions. If you get a mortgage with a power-of-sale clause, that’s an indication of a hybrid. The lender can bypass the court and hold a trustee sale — after obtaining a court order.

Check here to see if the home you’re buying happens to be located in a hybrid state.

Anyway, After the Final Payoff, the Home’s All Yours, Right?

Yes, although…

• As long as you own real estate, you’ll be paying property taxes to fund local government and services.

• You should still be paying for homeowners’ insurance, even though you’ll no longer have a lender looking over your shoulder to insist on it.

• You’ll need to keep up with your local homeowners’ association assessments.

These obligations will need your ongoing attention. If you neglect them, the agency you didn’t pay might place a lien on your home — staking a claim in its value.

Thank You for Getting Into the Weeds With Us Today

As you can see, the answer to a simple question, where a deed is concerned, can be complicated! We offer this article only as general information. Mortgage provisions vary by state and by loan. And states can change their rules.

To know how your own loan works, ask your mortgage company, and check your documents.