A lien is a claim or legal right against an asset, often established by a creditor or judge, that guarantees an underlying obligation. If the owner of the asset does not meet their obligation, such as repaying a loan, the creditor can seize the asset. Many people have liens placed on their homes if they have a mortgage, but there are several types of liens to be aware of.
In this post, our title and escrow experts explain different types of liens, how they impact title, the damage they can cause, and how to remove them.
How Different Types of Liens Affect Title
A lien on a home indicates there is an unpaid debt, and the lien will remain in place until the debtor pays back all that is owed. Liens must be reconciled prior to transferring a title to a new owner, otherwise, the new title owner risks significant challenges.
Both voluntary and involuntary liens are regulated by the state in terms of their priority, which determines the order in which creditors can acquire assets owed to them. The higher the lien ranks in priority, the more likely the home will have to be sold in order to pay off a debt.
While you may not like the idea of being in debt, the first lien on most homes is very helpful. A mortgage helps individuals afford a house over a period of time instead of requiring the buyer to pay the entire price with cash up-front. It literally gives us something to lean on so that we can dig our roots into our new community without obliterating the bank.
But when you have a mortgage, you pledge your home as security until you pay off the loan. As long as you keep making your regularly scheduled payments, you shouldn’t run into any problems. When selling your home, you must pay off the mortgage to clear the title for a clean transfer to the buyer.
If an individual fails to pay overdue taxes within 10 days of receiving a demand letter from the Internal Revenue Service, the IRS can place a tax lien against all of that individual’s property. A tax lien has priority over every other kind of lien and can drain a person of their assets; you do not want a tax lien placed on your home.
The IRS can repossess a home with a tax lien. This rarely occurs, but oftentimes, the owner is cornered into selling, refinancing, or facing foreclosure on their home. The government is paid for this tax lien when the seller and buyer close on the property.
A mechanic lien is placed when the homeowner owes money to a contractor for a home improvement project. These debts for unpaid services can cause trouble with the title, so any mechanic liens must be resolved before the title is transferred to a new owner. The seller and contractor can establish an agreement that the lien will be resolved from the proceeds of the home sale. This will clean the title before it is transferred.
Several different kinds of debt can result in a judgement lien, such as child support debts or money owed in an accident lawsuit. In this case, a plaintiff may be awarded a monetary judgement in court and a lien is recorded against the defendant. Like a mechanic’s lien, a judgement lien will obscure the title and need to be resolved before selling the home to a buyer.
Other Mortgages and Debts
Home equity debts and second or third mortgages are additional kinds of liens that can be attached to a property by lenders. Homeowners’ association dues that have failed to be paid can also show up as a lien. The order in which several liens were recorded generally determines which liens have priority.
How to Remove a Lien from a Property
Property title liens can generally be paid either from the home sale or foreclosure sale profits. If there is no established agreement that allows for this and the title remains clouded, the buyer has several options:
- Pay the debt and work with the creditor to remove the lien against the title
- If possible, negotiate with the creditor to settle the obligation at a discounted price
- File a quiet title action, or lawsuit, against the creditor to remove the lien
Buyers: Do Your Due Diligence
If you are considering buying a new home, it is essential to conduct a full title report in order to uncover any unresolved liens on the property. It is NOT a waste of time and money to hire a title company to conduct a thorough investigation into the title.
If a title investigation reveals a lien on the property, the title company will find the date recorded, the creditor, and the amount of debt so the lien can be properly resolved before closing.
Protect Yourself from Outstanding Liens
Ignore a lien on the title of your new home, and you may come to find your property technically does not entirely belong to you. While some liens are common and an anticipated aspect of being a homeowner, other liens can cause significant issues with buying or selling a property.
Whether you are already a homeowner or plan on buying a house in the near future, ensure you understand how a lien can impact your claim to a property. By purchasing a title report and title insurance from True Concept Title, you can guarantee your property belongs to you and remove the stressors of undiscovered liens.