Key takeaways

  • A lien serves as an official notice that you owe a creditor for unpaid property.
  • If you do not pay, the creditor can legally sell that property.
  • A lien can be either voluntary, such as buying a house, or involuntary, such as defaulting on a car loan.
  • Types of liens include judgment liens, tax liens, mechanic’s liens and HOA or condo liens.

A property lien is an official notice that a property owner owes money to a creditor. It gives that creditor the legal right to sell that property if the owner refuses to pay their debts. A lender can place a lien on a home, vehicle, or other asset used to secure a loan.

Liens may be voluntary or involuntary. For example,  a voluntary lien is placed on your home when you use a mortgage to buy it. The lender can foreclose on you if you don’t pay your loan. On the other hand, the government may put an involuntary lien on your home if you don’t pay your property taxes.

What is a lien?

A lien is a legal claim that a lender or other party makes against an asset because the owner owes money to the creditor. Liens may negatively impact your credit score or make it more difficult to sell your property when the lien is involuntary.

Involuntary liens occur without the consent of the person who owes money. There are a few situations where involuntary liens can be placed against your assets. Common examples of involuntary lien include judgment liens, tax liens, mechanic’s liens and HOA liens.

How liens work

When you fail to make payments on property like a car or a house, the creditor can get a lien, giving them the right to legally sell that property. An involuntary lien takes things even further. With involuntary or statutory liens, creditors can take legal action against you to get payment. This information may be public, letting others know that a lien exists on the property and must be released before a sale can be made.

Types of liens

  • Judgment liens result from a lawsuit in which a creditor sues a borrower and wins in court. Unlike property liens, judgment liens do not require the property owner’s consent. Courts can allow them without formal notice to the property owner.

    In some cases, judgment liens apply even to individuals who do not own property at the time of the judgment. The court may allow the creditor to place a lien on future property the defendant buys.
  • The government has the right to place a lien on property owned by someone who fails to pay income tax, property tax or other federal, state and local taxes.

    Unlike other types of liens, tax liens have priority over mortgages, which means that if the homeowner sells the property, the proceeds go to pay the back taxes before paying the mortgage. For this reason, some lenders agree to pay the delinquent taxes and add them to the mortgage.
  • These liens can be used if you hire a contractor to help renovate or repair your home. If you fail to pay your bill, the contractor can place this lien on your home.
  • If your home is part of a homeowners’ association or condo association and you fail to pay your dues, the organization can place a lien on your home until you get current on your bills.
  • A voluntary lien is one that both parties agree on. For example, when you get a mortgage to buy a home or use an auto loan to buy a car, you agree that the lender has a lien on your home or car.

What happens to your home equity if there is a lien on your home?

While having a voluntary lien on your home for your mortgage won’t impact your ability to apply for other loans, an involuntary lien on your property may. An involuntary lien on your home can restrict what you can do with your home and the equity you’ve built in it.

One of the first things lenders look for when you apply for something like a home equity loan or line of credit is active liens against your home. These liens can take precedence over their claim to your home, putting them at much higher risk if you default. That makes it almost impossible to borrow against your home equity or to refinance.

Involuntary liens also make selling your property almost impossible because lenders won’t give a mortgage to someone who wants to buy a home with a lien against it. However, it is normal and simple to sell your home if it has a voluntary lien placed on it by your mortgage lender, as long as you have kept up with payments on your mortgage.

How do creditors collect from a lien?

In some cases, creditors can force foreclosure or the sale of the property with the lien, but they rarely do so unless the owner owes a significant amount of money. One reason for this hesitancy is that the creditor must make regular payments until someone else buys the property.

For example, suppose a utility company places a lien on a house for an unpaid bill and decides to force a foreclosure to collect the debt. In that case, the utility company must pay the property’s mortgage until it sells.

Even after the owner sells the property, the mortgage company gets paid first, possibly leaving the utility company with nothing to reclaim. For this reason, most creditors prefer waiting until the homeowner decides to sell the property and take payment at the closing table. Tax liens, however, are an exception to this. The IRS can, and does, seize the assets of taxpayers who ignore tax liens placed on their property.

How do you remove a lien from your property?

The simplest way to remove a property lien is to pay the debt in full or negotiate with the lienholder for more favorable terms. After receiving the payment for the debt, the lienholder should apply to local authorities to remove it. Homeowners should keep meticulous records of the payments and verify that the lien no longer exists.

If you don’t have the funds to pay the lien, you can always try to borrow money to cover the cost. However, this can be difficult to do because getting to the point of creditors placing a lien on your home typically means that you have poor credit. It also means trading one unaffordable bill for another because you’ll have to find a way to repay the new loan.

Sometimes a lien placed on your property may be invalid. If this is true, don’t panic. Consult your state laws to determine the legal process for disputing a lien. You must often send a demand letter to the person filing the lien listing why it is invalid and asking them to remove it. If they refuse to remove the lien, it may be time to file a lawsuit.

Property owners who believe the lien is invalid can seek a court order to remove the lien. A judge can issue a court order if the homeowner has proof that the lien is unlawful or that he paid back all of the money owed.

In some states, liens are valid for a specific time unless the lienholder applies to extend the lien. This time varies by state and type of lien, but it often ranges anywhere from 90 days to 10 years. If the lienholder waits too long, the lien may expire, leaving the lienholder unable to collect the money.

Bottom line

Most people have voluntary liens on their property in the form of a mortgage. However, dealing with an involuntary lien can be a big headache because it limits what you can do with your home. In the worst case, you could lose your home, making it important to deal with these liens as soon as possible.