When you borrow money, it must eventually be paid back. Lenders don’t like to leave it up to the honor system, so in order to alleviate the risk, they may use liens. Not all debts require liens, but when it comes to a large debt, such as money borrowed to purchase a home or buy a car, a lien is a popular option for lenders to protect their investment.
What Is A Lien?
A lien is a legal claim against a real property (that which cannot be moved) or personal property (that which can be moved). In the event a debt isn’t paid, it allows a lender to collect that property to satisfy it. A lien helps guarantee that a loan will be repaid – in one way or another. If a lien is placed on a specific item, that item will be used as collateral to pay back the loan if the borrower cannot pay their debt. Liens also prohibit the borrower from selling the property without the lienholder’s consent. If the property is sold with the consent of the lienholder, the proceeds of the sale must first go toward paying off the debt. In some states, lienholders can force the sale of the property to repay the underlying debt.
Liens help lenders in another way – they’re public record. This means that if you try to get a new loan or line of credit, a new lender will know if you have any other existing liens and better determine the risk of extending credit to you.
There are several different types of liens that creditors, local governments, the IRS and legal entities can place on your property. They can be voluntary, in which you give consent to place the lien, or involuntary, in which the creditor gains the right to place the lien without your consent.
This article will cover both voluntary and involuntary liens in real estate.
Types Of Liens On Houses
Here are the most common types of liens on houses:
A mortgage lien is placed on the property when you use a mortgage to purchase a home or when you refinance. The house serves as collateral for the loan, meaning that if you don’t uphold your financial obligations of the loan, the lender could foreclose on your property. It also means that you can’t sell the property until you pay the mortgage balance in full or agree to use the proceeds from the sale to pay the mortgage balance off first. Mortgage liens are voluntary liens.
Tax liens are involuntary liens and can be used by the IRS if you fail to pay property taxes or federal income taxes. A federal tax lien is prioritized over all other liens from other businesses.
Mechanics’ liens are used when you fail to pay a contractor for work done on your property. Costs could be associated with labor or materials used. Based on the laws of your state, the contractor must record the lien within a certain amount of time after you failed to make payment (typically up to 6 months). In order to use this involuntary lien, the contractor must sue you in court within a certain amount of time and, if they win, they may be able to sell your home to cover their payment. If a mechanics’ lien is placed on your home, you cannot sell until the lien is no longer in effect.
Judgment liens help protect creditors that offer unsecured loans. Unsecured debt comes from loans that are not backed by any collateral. An example of this type of loan is a credit card. If you have unsecured debt and fail to pay it back, the creditor can file a lawsuit to obtain a lien. If the creditor is awarded a judgment lien, they can place it on the property to ensure payment.
Depending on its bylaws, a homeowners association can place a lien on your property for failure to pay HOA assessments or dues. With this lien, known as an assessment lien, the HOA can sell your home. Until the lien is removed, you cannot sell or refinance the home either.
How Does A Lien Affect The Sale Of My Property?
When you sell your home, the title company will perform a title search, which involves poring over public records to ensure that you can legally sell the property. It aims to prove who legally owns the home and to discover any liens or other claims on the property. Buyers, sellers and lenders will learn about any liens on the property when they receive the Closing Disclosure 3 days prior to closing. If there is a lien on the property, it could prevent or delay the sale of the property. In fact, liens are one of the common problems that cause closing delays. Until the issue has been resolved and the title has been cleared, the sale cannot proceed.
Can I Remove A Lien From My Property?
Liens can be cumbersome, especially when you’re trying to sell your home. Mortgage liens aren’t usually a problem because the lender usually allows you to sell the home and use the proceeds of the sale to pay off the loan. This is common in the mortgage industry. However, if you have other liens on the home, here are some ways to remove them.
- Pay the debt in full. This will remove the lien because there is no longer a debt to satisfy.
- Settle the debt through negotiation. Some creditors want to settle the debt just as much as you do and may take a lesser payment to get it done and over with.
- Correct the lien. If the debt has been settled, but the lien is still in place, contact the lien holder. It may be a simple mistake that they clear up immediately, but be prepared to produce any documentation that can be used as proof the debt has been cleared.
- Take legal action. If you feel the lien was obtained illegally (for example by fraud or coercion) or believe the claim is invalid or expired, you can take the lienholder to court to have the lien removed.
Summary: All About Liens
Liens help lenders ensure they’ll be paid back by using your personal and real property as collateral for money borrowed. The best way to keep them from becoming a problem is to stay current on your payments and pay off debts as you are able. Before taking out a loan or getting a line of credit, make sure you understand the terms of the loan and know your rights as a property owner. Before selling your home, make sure you know of any liens on the home and take the proper steps to settle them before they become an issue at closing.