What to Know About Home Liens and When They're Used
When people incur debts and own a home, it is possible that they could have a lien placed on the property. A mortgage is a type of lien that uses the home as a guarantee that the homeowner will make timely payments. There are other, less-common types of liens people might encounter, as well. Home buyers should understand how liens work before they start looking for homes or applying for a mortgage. This guide explains what a lien is, what it does, common types of liens, and how they affect homeowners.
1. What Is a Lien?
A lien is an outstanding debt that uses an asset, like a home, for collateral. Liens tend to come from a variety of possible places. Some, like the mortgage on the home, can show up as a lien until they have been paid off. Others might include:
- mechanic's lien for unpaid work completed on the property
- tax lien for unpaid taxes, particularly property taxes
- judgment lien involving payments determined by a court
These liens are uncommon and should raise home buyers' attention if they discover one. Generally, the lien serves to enforce a payment structure. If the homeowner does not resolve the lien in a timely manner, the party holding the lien may be entitled to sell the property and claim a portion of the proceeds in payment.
2. How Are Liens Prioritized?
Although liens may vary quite significantly in price, they must be placed in a specific order not necessarily by size. Lien priority means that certain groups get first access to proceeds from the home sale. Though each state regulates lien priority, tax liens are generally put in first position because a government organization is the recipient of the payment. Mortgages often place second, if the homeowner defaults on the loan. Judgment liens and mechanic's liens generally come after, although it can differ based on time. The day the lien was recorded can change its priority, with older ones ranking higher.
3. Why Do Professionals Put Liens on Homes?
A home mortgage is a natural lien on a home, since the home was used to secure the loan in the first place. For other types, homeowners may wonder why a professional would place a lien at all. If they come relatively low on the list, there is a possibility that the creditor could insist the home be sold, only to have no money left once the higher priorities have been settled. For most liens, the placement acts as its own guarantee that the homeowner will pay the bill. People generally do not want to go through foreclosure. Home buyers typically reject buying a home with unresolved liens on the title. It leaves people with few appealing options until they have paid the debt.
4. How Can Homeowners Resolve a Lien?
The best and usually the fastest way for Playa Del Rey homeowners to get rid of lien is to pay off the loan or invoice. Once they have, they can ask the creditor to file paperwork to resolve the lien, which removes the claim from the title. If people believe that the lien is not an accurate representation of the situation, they can get legal assistance to argue with the creditor until they achieve a satisfactory result. They may also be able to settle the debt for less than the total, as long as the claimant is willing to resolve the lien with the lower payment. Filing for bankruptcy also could eliminate the lien, but tends to serve as a worst-case scenario.
5. What Does a Lien Mean for the Home Buying Process?
Home buyers should view the title report as an important part of their due diligence. Sometimes sellers have a lien on their properties of which they were completely unaware. If a lien shows up in a title report, home buyers will need to investigate the details - though often the title or escrow company may do so on behalf of the buyer. The report can identify the date the lien was filed, the creditor, and the amount owed. Buyers should confirm that any lien information is either resolved or removed before the purchase continues. If sellers are caught unaware by the news, they may need extra time to come up with money to pay off the debt or to have the lien removed from the title. Buyers should ask their real estate agents for advice on how to move forward, depending on the nature of the lien.
Having a lien placed on a home often prevents a home from being sold until it is resolved. Understanding what a lien means for the clear ownership of a home helps prospective home buyers to appreciate the importance of early research before they make the purchase. This initial expense of time and money could help prevent problems down the road.