Liens Explained: What Is A Lien And How Does It Work?

Whether you are purchasing your very first home or dealing with an uncomfortable letter in the mail, you may come across a lien. What is a lien, exactly? It’s an indication that a homeowner – current or past – may have unfinished business with someone.

What Is A Lien?

A lien is a legal claim that gives someone or an entity the right to take possession of an asset under certain conditions.

A mortgage is one of the many different kinds of liens. Homeowners who work with a lender to purchase a home must allow the lender to become lienholders. If the homeowner doesn’t stick to the agreed-upon payment schedule, the lien gives the lender the right to repossess the property.

How Does A Lien Work?

A lien can be made against a property, which serves as collateral. When the owner wants to sell the property, the proceeds of the sale must satisfy the liens in order of importance.

For example, let’s say you owe a lienholder $10,000. When you sell the property, you must repay the lien from the sale proceeds. If you have multiple liens on the property, the liens must be repaid in order of appearance. With that, the first lien filed on public record is often the first lien repaid.

What Are The Different Types of Liens?

On the surface, the different types of liens are relatively similar. But it’s helpful to understand each of them.

Real Estate Lien

A real estate lien is put on your house by a mortgage lender. It gives the lender the right to take the house back if you don’t make your payments. When you make your last mortgage payment, the lien on your house is removed and you own the home free and clear.

Tax Lien

A tax lien could be placed by local or state governments or the IRS for nonpayment of your income taxes. Like a mortgage lien, a tax lien could result in the foreclosure of your home, so it’s important to be aware of tax liens on properties.

If you sell the house with a tax lien, you’ll need to have enough equity to pay off the lien.

Judgment Lien

Typically, judgment liens arise when you lose a lawsuit and have to pay a court-ordered amount. If that’s the case, the lien will remain in place until the judgment is fully paid off.

Mechanic’s Lien

A mechanic’s lien is put in place by someone who’s doing work on your home or car or anything else they might be working on. The lien is in effect from the time they begin the job until they get paid according to the terms of your contract. If, for some reason, a payment wasn’t made, it could be taken out of your profits from the sale of the property.

How Do You Find A Lien On A Property?

Liens are a part of the public record, so you can perform a title search to find any existing liens for a property.

If you want to go it alone, you can ask to conduct a title deed search through your local recorder’s office. But you can also hire a title search company to perform this search for you. If you’re purchasing a home, the lender will likely require you to complete a title search through a reputable company.

Many title companies offer title insurance, which guarantees accuracy. If the title company misses something in its search that leads to damages, title insurance will foot the bill.

How Do You Get A Lien Off Your House?

Most commonly, you get a lien removed by either fully paying off your debts, paying for work under an agreement, satisfying a judgment or paying back taxes. By completing any of these actions, you’ll receive and fill out a lien release that will remove your lien.

If you feel a lien has been wrongfully placed, there are certain circumstances in which you may have to go to court to have it removed. Consider reviewing your options with a legal professional if you aren’t sure which steps are best suited for your situation.

FAQs

You have questions about liens. We have answers.

What is a lien on a house?

A lien on your house means that someone has a legal claim to use the property as collateral. For example, a lender may place a lien on your property until you successfully repay the entire mortgage loan.

Can you sell a house with a lien on it?

It’s possible to sell your home with a lien on it. But the type of lien involved will determine whether or not you are allowed to move forward with the sale. If the house has a lien, be prepared for some of the sale’s proceeds to cover the amount you owe.

Do liens affect credit scores?

If you have a lien, there’s a chance it could impact your credit score because it can show up on your report. It’s common to have a lien on your home (if you have a mortgage) or your car (if you have an auto loan). If you pay these bills on time, it could benefit your credit score because you have a good credit mix and payment history. However, if you have things like judgments, mechanic’s liens or back taxes to take care of, it could present a bigger issue for your credit.

Can a federal tax lien be removed?

A federal tax lien can be removed if you pay the IRS the total amount due, or the agency determines the remaining debt is unenforceable. In general, the IRS will only deem a tax lien unenforceable after over 10 years of collection attempts.

Can I refinance my home if there’s a federal tax lien on it?

In general, tax liens have to be paid off before you close on your home. The only exception is if the Federal Housing Administration (FHA) allows for you to close with a tax lien under certain circumstances if you’re on a repayment plan and have made at least 3 months of documented payments. If you’re considering refinancing, we recommend speaking with a Home Loan Expert about your situation.

What does it mean to have a lien against you?

When you have a lien against you, it means that someone has a right to your property under specified circumstances. Typically, these would involve defaulting on an agreement or loan. The government will place a lien on your property over unpaid taxes as well.

The Bottom Line

Liens don’t have to be a bad thing. Sometimes it just means you haven’t finished paying off a debt. Anyone who has a mortgage has a lien on their home. But understanding what a lien is can help you navigate the home buying and selling process without any unexpected bumps.