What Is A Lien On Real Estate?
A "lien" is a notice attached to your property that informs the public that you owe money to a creditor. Typically, a lien is public information. It's usually filed with a county records office (for real estate) or a state agency like the secretary of state's office (boats, mobile homes, office equipment, and the like).
Creditors often use liens to recover money owing to them. When you get a lien placed on your property, it essentially becomes the debt's collateral. Clear title is required to sell or refinance the property. Your title becomes tainted if you have a lien on your home, mobile home, automobile, or other valuables. Paying down the lien is required to clear the title. As a result, creditors are well aware that placing a lien on property is a low-cost, almost-certain method of collecting what they're owed—sooner or later.
Priority of the lien
In the event of a foreclosure, lien priority dictates how creditors are paid. When one lien has "priority" over another, the first lien is paid first. Liens have precedence in the order in which they are registered, according to the legal principle of "first in time, first in right."
The "first in time, first in right" rule does, however, include exceptions, as do other legal norms. Some liens, such as property tax liens, mechanic's liens, and homeowners' and condominium association assessment liens, have precedence over previously recorded liens on real estate, depending on state law.
What are some of the most common real estate liens?
Residential properties, for example, are often encumbered by several liens. Certain liens, such as mortgage liens, are voluntary, meaning the homeowner choose whether or not to have the lien placed on the property. Others, such as homeowners' association liens, property tax liens, judgment liens, and mechanic's liens, are imposed without the consent of the owner.
Liens on a home
When you get a loan to purchase a home, the lender does a title check to determine whether the property has a clear title before providing you the money. If the property's title is clear, you'll probably sign a mortgage or deed of trust (or something similar) to secure the obligation. The lender will next register the mortgage, also known as a first mortgage, in the public land records in order to create a lien on the property. If you take out another loan from a different lender, such as a home equity line of credit, the second lender will record it and get a second lien on the property.
Liens asserted by homeowner's associations
If you don't pay your homeowners' association (HOA) dues, your house may be seized by the HOA. Due to the rules of the Declaration of Covenants, Conditions, and Restrictions, HOA debts are normally junior to a first mortgage. The HOA lien, however, may be superior to the mortgage lien if your state has a super-lien legislation.
Liens on property
Almost all other forms of liens, including mortgage liens, are inferior to property tax liens. If you or your loan servicer fail to pay your property's taxes, it may be sold in a tax sale. If the property is sold in a tax sale, both you and the lender may lose ownership. Loan servicers often pay property taxes when a homeowner does not because tax sales remove mortgage liens.
Liens arising from a judgment
When someone wins a case against you, a judgment lien is generated. The judgment is generally recorded against your property.
Liens of a mechanic
If you hire someone to work on your house, such as to build a new roof or perform another significant improvement, the contractor may file a mechanic's lien on the property if you fail to pay them for their services. A second-lien mortgage is also preferable to this sort of lien.
When it comes to real estate liens, how do creditors get paid?
Creditors often have the right to have real property auctioned to pay off liens, which is typically done via the foreclosure procedure. However, they seldom do so, with the exception of mortgage and property tax liens. Most other debts take a backseat to mortgages and property tax liens. When a creditor forecloses on a junior lien, the property subject to the mortgage or tax lien becomes the property of the creditor.
Rather of forcing a foreclosure sale, creditors normally wait until the property is sold before taking action. Buyers are more likely to pass on a property if the title is clean, meaning there are no liens on it. As a result, the seller will pay off any existing liens with a portion of the purchase price.