What does the 'title theory' imply?

The title theory implies that the lender holds the title to the property as a security interest until the borrower fulfills their obligations under the loan agreement by fully repaying the mortgage. In this legal framework, once the loan is executed, the lender essentially has ownership rights, which gives them the authority to take possession of the property in case of default, although the borrower still occupies and uses the property during the loan term. This structure establishes a clearer path for the lender to recover their investment, as they maintain legal title until the debt is satisfied.

This concept contrasts with other theories, such as the lien theory, where the borrower retains equitable title throughout the life of the loan, and the lender’s interest is merely a lien against the property. In situations where a third party holds the title, that typically pertains to specific escrow or trust arrangements rather than a standard mortgage transaction under title theory. Therefore, the understanding that ownership lies with the lender until the loan is repaid fundamentally defines title theory and its implications in real estate financing.