The word “lien” can seem ominous, especially when it’s associated with your home and/or property, but it’s incredibly common when it comes to real estate. Read on for details about liens, including how they affect properties for sale and how best to resolve them.
What is a lien?
A lien is a legal claim to an asset, filed by a creditor, to obtain access to that asset if debts are unpaid.
A lien can be voluntary or involuntary, and the difference is important. If it’s voluntary, the creditor (the party who is owed money) and debtor (the party who owes money) sign a contract agreeing to the lien.
The most common type of voluntary lien is a mortgage. When you apply for mortgage financing you sign a lien that makes the property collateral in case you default on your loan payments. In other words, the lien represents the debt you owe to the lender. While there are consequences if that debt goes unpaid (more on that later), a voluntary lien is not meant to enforce payment of a past debt. However, that is the case with involuntary liens.
When a lien is involuntary, it’s imposed on a debtor by the government or a court against the owner/debtor’s will. Involuntary liens usually arise as a result of unpaid debts. For example, a tax lien can be issued by the government when income or property taxes are unpaid. Involuntary liens are only removed when the debt is paid.
Who files a lien?
A county records office or state agency typically grants a lien after a creditor has tried multiple times to collect on their debt. Once a lien is filed and approved, it is delivered to the debtor and is in the public record. If the debtor doesn’t pay the debt, the creditor can take ownership of the property/home.
How does a lien affect a property for sale?
Although a property with an involuntary lien can be sold, most buyers won’t move ahead with the purchase once a lien is disclosed or discovered. This is because the lien is tied to the property rather than to the debtor. By purchasing a property with a lien on it, a buyer essentially clears the legal and financial burden of the seller and takes the debt on themselves.
Banks and mortgage lenders generally won’t provide financing for homes and land with involuntary liens, which are discovered when conducting title searches.
READ: Construction Loans: Everything You Need to Know
What are common types of property liens?
There can be multiple liens on a single property, so it’s important to determine lien priority. This refers to the order in which liens will be paid off to creditors in case of a foreclosure. Lien type priority differs according to state law.
- Mortgage lien: Anytime you apply for a mortgage, the bank will file a lien on the property. This means they’ll have ultimate legal ownership until you pay off the loan. In addition to conventional mortgages, other types of loans requiring liens include USDA loans, FHA loans, VA loans, home equity lines of credit, and home equity loans.
- Mechanic’s or construction lien: If you hire a contractor to do work on your home and then don’t pay, they can file a lien on your property. If your contractor hires (and doesn’t pay) a subcontractor, the subcontractor can also file a lien on your property.
- Homeowners' Association (HOA) lien: When a property owner doesn’t pay their homeowner’s association fees, the HOA can file this type of lien.
- Property tax lien: When you don’t pay property taxes, your state or local government can file this type of lien. These liens have priority over most other types (including mortgage liens), meaning they need to be satisfied first. Since unpaid tax liens can result in property loss for the homeowner and the lender, lenders typically pay them off if need be.
- Federal tax lien: Imposed by the IRS, this type of lien applies when you don’t pay federal taxes. These types of liens are general, meaning they apply to multiple assets, including real estate properties, bank accounts, and more. As with property tax liens, they tend to have priority.
- Judgment lien: This type of lien is imposed by a court or by collectors of credit card debt, unpaid medical bills, or personal loans. It gives a creditor the right to take possession of your property if you don’t pay them.
- Child support lien: Imposed when a homeowner owes child support, it requires prior court approval.
How to check for liens on a property?
You or your real estate attorney or title company can conduct a title search to determine whether the title on your property is clear. This is typically done when purchasing title insurance. A lien on your property will cloud your property claim. The same process is used to determine whether a property you’re looking to buy has a lien on it.
What can I do if there’s a lien on my property?
If you learn there’s a lien on your property, hire a real estate attorney, foreclosure attorney, or debt settlement lawyer to help. Not only will having a lien make it difficult to sell your property, it will also lower your credit score.
To remove a lien, the attorney will need to contest it in court and prove that it’s invalid. Otherwise, you’ll need to pay the lien holder the amount owed, have the lien holder sign a lien release document, and record the lien release at your local county recorder’s office.