What does "title theory" imply in real estate?

Title theory in real estate implies that the lender holds the title to the property until the mortgage is fully paid off. This means that in states that follow title theory, when a borrower takes out a mortgage, they effectively transfer the legal title of the property to the lender as collateral for the loan. The borrower retains equitable title, giving them the right to use and occupy the property, but the lender has the legal title, which grants them certain rights, such as the ability to foreclose if the borrower defaults on the mortgage.

This structure is significant because it allows the lender to have a stronger claim to the property in the event of non-payment. The borrower must fulfill their obligations to the lender to regain full ownership of the title. Understanding this concept is critical for real estate transactions, as the implications of title theory can affect both borrowers and lenders regarding their rights and responsibilities.