If you have purchased properties before, you may very well know the definition of lien. However, if you are a first time homebuyer, you may be unfamiliar with the definition. Let’s discuss.
So, what is a lien? A lien is a security interest in a piece of property that secures the payment of debt or another agreed upon obligation.
There are many types of liens. There are liens on homes, boats and automobiles. Most people are familiar with liens on automobiles as that is the reason that the banks hold your title until the loan is paid in full. Once paid in full, the bank removes their lien from the title of the automobile and issues a new title with only the owner’s name. For the purposes of this article, we will be focusing on liens on homes.
There are many different types of liens that can be place on homes. Let’s discuss the different types so that you understand the differences.
The most common forms of liens are mortgage liens. A mortgage lien is the encumbrance of the property by a mortgage lender for the life of a loan. In other words, a lien is placed on a home by a mortgage lender to secure their interest in the collateral or property. A property lien is usually public record and filed with the county records. This filing shows that a lender has ownership in a property until the mortgage loan is paid in full. When a lien is on a property, the home cannot be sold until the mortgage lien is paid off. Otherwise, the buyer of the property would not hold clear title.
There are different types of mortgage liens. If you get a mortgage when you purchase the home, the mortgage lender will put a lien on the property. This is considered a first lien position or senior lien.
If you have a second mortgage or home equity line of credit, those would also be mortgage liens. However, those would be second lien positions or junior liens. It is much riskier for a lender to make a second mortgage than a first mortgage. The reason is that if the home goes into default, the first mortgage must be paid first. As a result of taking more risk, second mortgagees charge more in interest than first mortgagees. That is why second mortgage rates are generally higher than first mortgage rates.
In order to have a mortgage lien removed, you must pay off the loan in full. This can be done by paying the loan over time, paying it off in cash, or refinancing your original mortgage. If you refinance your mortgage, the new mortgage lender will pay off your existing mortgage. After being paid in full, the original mortgage lender will prepare a legal document such as a satisfaction of deed of trust and file it at the court house. This will cancel the deed of trust which is the instrument that puts the lien on the home.
Liens can get a bit more complicated if you have a first and second mortgage and want to refinance your first, but keep your second mortgage. You will need to have your new mortgage lender to ask the 2nd mortgagee if they will do a subordination agreement. This agreement would involve the second mortgagee agreeing the new mortgage lender to go in first lien position ahead of them. If the second mortgagee will not agree to subordinate, then you will have to pay off the second mortgage either in the refinance process if possible or pay it off personally.
Judgement Liens, Child Support and Alimony Liens
This type of lien is where a creditor has taken you to court and wins a judgement against your property. Liens can be placed on the property if you are behind in child support or alimony. In order to have these types of liens removed, you can pay the lien in full. In some states judgments may become void after 25 years. This can vary from state to state but creditor must execute a document that releases the lien.
Property Tax Liens
There are many creditors that have a right to place liens without filing lawsuits. One of those creditors is the government. For example, a tax lien can be filed if you failed to pay your taxes. Typically, a tax lien will take priority over mortgages even if it was filed after. Tax liens are usually senior lien positions. Usually the mortgage lender will pay the taxes and add that to your mortgage in order to keep the property from default. If the taxes are not paid, the government could sell your home in order to get the monies owed. As with other liens, you must pay the taxes and any penalties in full in order to have the lien removed.
IRS Tax Liens
Unpaid federal taxes can also result in having a lien placed on your property. As you may be aware, the IRS has a process for getting paid unpaid taxes. They will usually try to garnish wages as a first attempt to collect federal taxes. However, if you are not employed or if you lack sufficient wages for the IRS to collect the taxes, they may resort to filing a property lien. The IRS is known to be very aggressive and they are known to force sales or properties to collect their money. So you will want to avoid an IRS tax lien at all costs. If you do get an IRS tax lien on your property, you will want to pay it off as soon as possible to have it removed.
Another type of lien is a mechanics lien. These liens are put on homes by contractors. These types of liens are very common and often seen on foreclosed homes or distressed properties. Contractors will place these liens on the property when they have performed work on the property but not been paid. They can be removed once they are paid in full.