Which theory states that a mortgage creates a lien on a property?

The theory that states a mortgage creates a lien on a property is known as lien theory. Under lien theory, when a borrower takes out a mortgage, they retain legal title to the property while the lender holds a lien against it. This lien represents the lender's legal right to take possession of the property through foreclosure if the borrower defaults on the loan.

This concept is significant because it distinguishes the relationship between the borrower and the lender. The borrower remains the owner of the property, but the lender has a financial claim to it until the mortgage is fully paid off. This framework is prevalent in many states in the U.S. and emphasizes the borrower's retained ownership rights during the term of the mortgage.

Understanding this theory is essential in real estate as it governs how property ownership and financing are structured, influencing both buyer and lender rights.