Tennessee Realtor State Practice Exam

What does lien theory indicate about title ownership?

1. The borrower holds both legal and equitable title.

2. The lender holds legal title only.

3. The property is owned by a third-party investor.

4. The lender has a lease on the property.

The correct answer is: The borrower holds both legal and equitable title.

Lien theory is a legal concept that pertains to the relationship between a borrower and a lender in the context of real estate financing. Under lien theory, when a borrower takes out a mortgage on a property, they retain both legal and equitable title to that property. This means that the borrower has the rights of ownership, including the ability to occupy and use the property, as well as the responsibility for fulfilling the terms of the mortgage. The lender, while having a lien on the property as security for the loan, does not take legal title in the sense of owning the property. Instead, the lender's interest is primarily in the right to collect payments and, if necessary, foreclose on the property should the borrower default. This structure allows the borrower to maintain ownership rights while using the property, which is a significant aspect of lien theory as it reflects the borrower's ongoing interest in their home or real estate asset. In contrast, the other provided options suggest misunderstandings of lien theory. For instance, the idea that the lender holds legal title only misrepresents the reality that the borrower retains both titles. Similarly, the notion of a third-party investor owning the property or the lender having a lease fails to capture the fundamental principle of lien theory, which revolves around