Heard the term “real estate lien” thrown around, but not sure what a lien on property is?
Liens can be general or specific, voluntary or involuntary. As the name suggests, a voluntary lien (such as a mortgage lien) is one you agree to. An involuntary lien (such as a judgment against you)… not so much.
Despite the official definition being in legalese, liens are actually quite simple. Here’s what you need to know about real estate liens — including how to remove them.
In This Article:
A lien is a legal claim to your property in the event you default on a payment.
In other words, a lien against your property makes it collateral in case you default.
The most common example lies in mortgage loans. When you take out a mortgage, the lender places a lien against your property in your county’s public records. You signed this document at the settlement table, called either the “Mortgage Note” or the “Deed of Trust.”
It gives the lender the right to repossess the collateral — your property — if you default on your payments. You know this process as foreclosure.
Lenders can record liens against other types of property too, not just real estate. For example, when you take out a car loan, the lender places a lien on your car as the collateral for the loan. If you stop paying, they repossess your car.
A lien gives a creditor the legal right to collect their debt by repossessing or forcing the sale of your property.
When you borrow a secured loan, such as a mortgage or car loan, you voluntarily sign a deed of trust or mortgage document to place the lien against your property. That secured collateral is precisely why you can borrow money cheaply: the lien protects the lender in case you default.
However, creditors can sometimes place liens on your property against your will, called an involuntary lien. If you fail to pay your taxes, for instance, the IRS can place a tax lien on your property to recover what you owe. More on the different types of liens shortly.
When you go to sell a property, you must repay all debts secured with a lien against it. Otherwise, the property can’t convey to the new owner with a clean title history.
Say a property has multiple liens against it, from two mortgage loans you borrowed. The loan in first lien position (your first mortgage) gets first priority for repayment. Your second mortgage only gets paid back after the first mortgage loan is paid in full. Assuming you owe less than the sales price, everyone gets back in full. But what if you’re upside-down on the property?
For example, say you owe $100,000 on a first mortgage and $25,000 on a second mortgage, but your property only sells for $115,000. Ignoring closing costs, your first lender would receive the full $100,000, and your second mortgage lender would get only $15,000. They could then pursue you for a deficiency judgement for the remaining $10,000 you owe them.
Lastly, note that liens appear in a title search on your property, but not on your credit report. Judgments do appear on your credit report however, and damage your credit score.
Imagine someone has two mortgages and a HELOC against a property, and they default. Which lenders get paid first?
For any given property with multiple liens, there’s a priority order. In most cases, liens are ordered chronologically. The first lien recorded gets first priority, the second lien gets second priority, and so forth.
If you default and the property goes to foreclosure, the money goes toward paying off the lender in first lien position. If there’s any money left over after that, it goes to the lender in second lien position. And so it goes, and if any proceeds remain after paying off all creditors, you get them.
But as in everything else, the government can do whatever it wants and jump the line to get paid first if they secure a tax lien against you. Uncle Sam always wins in the end.
While mortgage lenders nearly always foreclose if you default on your monthly payments, most other lienholders rarely go through the hassle of foreclosing.
Instead, they wait for you to come to them. They know you have to when you want to sell your property.
And when you do come to them asking for a payoff quote, they charge you interest for all the years or decades that you owed an outstanding balance.
The maximum interest rate that judgment holders can charge varies by state. On the low end, New Jersey only allows 3.5% per year, while creditors can charge up to 12% in Vermont, Massachusetts, Rhode Island, and Washington.
