What is a mortgage lien? How this and other kinds of home liens work

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When you buy a residence as your primary place to live, you become a homeowner. At least that’s how the common narrative unfolds. Yet, if you take out a mortgage to purchase the property, which many homeowners do, homeownership is a bit of a misnomer. In fact, when you get a mortgage, your lender places a mortgage lien on your property, which allows the lender to take possession of your home if you do not repay the loan.

What is a mortgage lien?

At its core, a mortgage lien is a financial claim to your property, which serves as collateral — or a real security — for your mortgage. If you default, the lien permits the lender to take possession of and sell your home in order to recoup the outstanding debt.

Although they may sound negative, mortgage liens make homeownership possible for millions. As long as you pay your monthly mortgage payment installments on time, the lien is rather a formality that does not preclude you from selling your house or refinancing your mortgage.

Other kinds of home liens 

Other property liens, however, can spell adversity, especially when they are involuntary. Unlike mortgage liens, which the homeowner agrees to by taking out the loan, involuntary liens can happen unwillingly, usually because of accumulated debt. When an involuntary lien is placed on your home, the property’s title is no longer clear, which can prevent you from selling the house until the lien is addressed.

There are several common involuntary property liens:

  • Property tax lien – Your state or local government can issue a property tax lien for unpaid property taxes.
  • Federal tax lien – The IRS can place a lien on your property due to failure to pay your federal taxes. Note that the lien can cover your personal property as well as other real estate assets, any vehicles and financial holdings.
  • Homeowners association (HOA) lien – In most jurisdictions, HOAs wield the power to place a lien on your home if you do not pay your HOA fees.
  • Mechanic’s lien – Contractors can place a lien on your home if you do not pay them for work they’ve done on your property.
  • Judgment lien – In the event you lose a lawsuit, the plaintiff may file a judgment lien until you pay the money the court awarded to the plaintiff. Collectors of credit card debt, outstanding medical bills or personal loans may also secure a judgment lien against your property.

Aside from voluntary or involuntary, liens can also be specific or general. The former attach to a certain property, often the homeowner’s primary residence. The latter can apply to several properties or to other assets such as cars, bank accounts and investment portfolios. A common example of a general lien is an IRS lien.

What is lien priority?

The priority of the liens on a property, sometimes called lien positioning, identifies which debt will be repaid first in the event of default and foreclosure. Typically, any money owed to the government takes precedence. Hence, federal and property tax liens trump the “first in time, first in right” rule, which mandates that whoever records a lien first will be paid first.

Let’s say you have a $200,000 mortgage. Five years after purchasing your home, you take out a second mortgage in the amount of $40,000. Two months after you take out the second loan, a contractor places a $10,000 mechanic’s lien on the property for unpaid renovations. Then, a year later, a property tax lien is levied for $2,000.

Suppose you then sell your home for $250,000. In this scenario, the property tax lien must be paid back first with the proceeds of the sale, followed by the balance of the first mortgage and then the balance of the second loan. The contractor will be paid last, and, because of lien priority and the outcome of the sale, may not receive anything at all.

What to do if there’s a lien on your property 

The most important thing to remember is not all liens are bad. A mortgage lien is evidence of a steady record of paying down your home loan, which can help boost your credit and build wealth over time.

Up until about three years ago, an involuntary lien could damage your credit score. In 2017, the three credit bureaus (Experian, TransUnion and Equifax) agreed to drop tax and judgment liens from their credit reports. The decision reflected the fact that because various parties can place liens, they are often inaccurate or incomplete.

Yet, local public offices still retain lien information, so your ability to secure a new loan or sell your property can still be affected if there’s an involuntary lien on your home. To check for an involuntary lien, you can contact your county’s assessor, clerk or recorder, or search the online lien databases some jurisdictions maintain. Title companies also carry out a lien investigation when they conduct a title search.

If you do have a legitimate involuntary lien, you can usually get it removed by paying off the debt in full, negotiating a payment plan with the issuer or filing for bankruptcy, which can automatically erase some liens, such as second mortgages. However, bankruptcy is a decision not to be taken lightly and can have serious ramifications for your finances, so it’s best to explore alternative routes before proceeding with this option.

Erroneous liens, meanwhile, can usually be disputed with the issuer, and challenged in court if an outside resolution isn’t possible.

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