Liens: Defined And Explained

If you used a mortgage to purchase your home, you might already know what a lien is, since you’ll have a lien on your property until you pay off the mortgage loan.

Though it might sound like some complex legal jargon, a lien is essentially a legal tool used by those who are owed money to ensure that they’re paid back. Let’s take a closer look at exactly what liens are and how they work.

A lien is a legal claim against property that can be used as collateral to repay a debt. Depending on the type of debt owed, liens can be attached to real property, such as a home, or personal property, such as a car or furniture.

For example, mortgages or property tax liens are attached to the real property on which the mortgage or taxes are owed. Personal property such as a car might have a lien on it if the owner is still paying off the auto loan they used to purchase the vehicle. Judgment liens can generally be attached to both real and personal property.

Liens Explained

When filed against your real property, a lien gives the lien holder the ability to foreclose on your home. This is why, as part of the mortgage process, lenders will have a title search completed. A title search will uncover any liens attached to a property’s title. Mortgage lenders won’t approve a mortgage if the property has any outstanding liens.

If you want to sell a home that has a lien on it, you’ll most likely have to pay off the debt associated with the lien before you can do so.

There are a few different types of liens, each with their own nuances, but in general, a lien means that the lien holder has a right to the property in question.

Because liens are placed on property, which are an illiquid type of asset, lien holders have the ability to force the sale of the property to satisfy the debt.

If you owe $5,000 to a lien holder, for example, they can’t just magically make $5,000 in cash appear from the bricks of your home. They can, however, wait until you sell your home and then take $5,000 from the proceeds.

When a property with multiple liens on it is sold, each lien holder typically has a right to the proceeds. Usually, liens will be paid according to when each lien holder recorded their lien; the first person to have recorded their lien will be paid first, and so on. However, other lien types, such as property tax liens, may take priority regardless of when they were recorded.

Lien Example

Let’s look at an example of how a lien typically works.

Say you got a mortgage to purchase your home. You hold title on your home, meaning you’re the legal owner of the property. But because you owe your mortgage lender the money they lent you to buy your house, they’ll put a lien on the property.

As long as you make your monthly mortgage payments, the lien won’t come into play. The lender will remove the lien once you finish paying them off, either at the end of your mortgage term or by using the proceeds from the sale of the home.

However, if you stop making payments on your mortgage, the lender may eventually begin foreclosure proceedings. During this process, your lender will seize the home and sell it to recoup their losses. The lien allows them to do this.

If you have more than one lien on your property, those lien holders will also be in line to receive some of the proceeds from the sale of the home once your mortgage lender or any other senior lien holders are paid.

There are several types of liens that you may encounter, each with its own purpose and circumstances for use.

Voluntary Vs. Involuntary Liens

The first distinction that should be made when discussing types of liens is voluntary liens versus involuntary liens. Voluntary liens are permitted by the owner of a property in order to secure a loan.

On the other hand, involuntary liens are typically the result of failing to pay someone you owe a debt to. With these types of liens, you don’t have to agree to have the lien recorded on your property.

Here are a few examples of different types of liens.

Mortgage Lien

A mortgage lien is a voluntary lien. When you get a mortgage, the property you’re purchasing will act as collateral if you default on the loan.

Bank Lien

A bank lien is another type of voluntary lien. When you borrow money from a bank to make a large purchase, you can secure the loan with collateral. For example, you may use a car to secure a car loan. In the event that you default on the loan, the bank lien allows the lender to collect and sell the car to recoup the loss.

Mechanic’s Lien

A type of involuntary lien, a mechanic’s lien guarantees payment to a builder for a property’s construction or renovation. If a contractor or subcontractor completes work on your home and you don’t pay them, they can file a mechanic’s lien on your property.

Judgment Lien

A judgment lien is another type of involuntary lien that’s the result of a court judgment against you. If you owe someone money and refuse to pay, they can sue you. If the court rules in their favor, they can file a judgment lien on your real property and, in many cases, any personal property you own. Judgment liens can also attach to property you acquire after the lien is filed.

Income And Property Tax Liens

If you owe your local, state or federal government money, they can put a lien on your property. This can happen if you don’t pay your income taxes or property taxes.

Depending on the type, having a lien on your home could simply mean that you agreed to have your home act as collateral for a debt you owe, such as a mortgage. In this case, nothing happens with the lien as long as you continue to make your monthly mortgage payments.

However, it could also mean that you’ve failed to pay your debt, and that your creditor is one step closer to foreclosing on your home to satisfy that debt. In this situation, you’ll want to take steps to have the lien removed, which most often involves repaying your debt. If the lien is not removed, the lien holder can foreclose on your home to recoup their loss.

To have a lien removed from your property, you’ll typically have to convince the lien holder to remove it – most often, by paying them. However, that may not be the only option available to you. If you have a lien on your home, you can:

• Pay off the lien: The best way to make a lien disappear is to pay back the lien holder. Be sure to confirm that the lien has been removed.
• Negotiate the lien: If you can’t pay back the lien holder in full, you may be able to negotiate a partial payment or a payment plan in exchange for a lien release.
• Dispute the lien: If the lien isn’t valid, you can go to court and ask for a court order to have the lien removed. You’ll need to provide evidence to back up your claims that the lien is invalid.

If you have title insurance, you can also file a claim with your insurer to have the lien resolved.

Let’s answer some of the most frequently asked questions about liens.

How do I find out if there's a lien on my property?

When borrowers embark on the mortgage process, lenders will order a title search to be completed. This search will show if there are any liens attached to the property’s title. If lenders see that a property has outstanding liens, they won’t approve the mortgage for the borrower.

What’s the difference between a mortgage and a lien?

A mortgage allows people to borrow money to make a purchase, while a lien is a legal claim against property that can be used as collateral to repay a debt. Technically, a mortgage is a type of lien – a voluntary lien.

Can I sell my house if there’s a lien on it?

If you’re looking to sell your house that still has a lien on it, you’ll most likely have to pay off the debt associated with the lien before you can move forward with selling your house, or negotiate for the lien to be paid directly from the proceeds of the home sale.

Remember, not all liens are bad liens. As long as you pay your monthly mortgage payments, for example, your mortgage lien probably won’t have too much of an effect on your daily life.

However, many types of liens do put your property at risk, so it’s important to get them resolved as soon as possible. Even if the lien holders decide not to foreclose, these liens can make it impossible for you to sell your home or refinance your mortgage.

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