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What is a first lien?
A first lien is the first to be paid when a borrower defaults and the property or asset was used as collateral for the debt. A first lien is paid before all other liens. A bank that holds the first mortgage on a property has the first lien.
There are several lien categories, but the most common is a mortgage. If a property owner can’t pay the mortgage, the mortgage lender will foreclose. The lender can then sell the property and be first in line to receive any proceeds from the sale or keep possession of the property. The holder of a first lien takes on less risk than subsequent lien holders.
Loans are straightforward when there is only one lien, but circumstances can get complicated when there is more than one lien on a property. Most lenders will provide credit on properties only when they can be in the first lien position.
First lien example
Morton buys a house and is granted a mortgage loan from Bank A. Bank A puts a lien on the property’s title and becomes the first lien. After a few months, Morton secures another loan using the same property as collateral, but this time from Bank B. Now Morton’s house has two liens attached to it.
Morton ends up defaulting on both mortgages and the banks decide to sell the house. When the house sells at a foreclosure auction, Bank A is the first to recoup its investment. Bank B, as the second lien holder, gets whatever is left after Bank A is paid.
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