A mortgage lien may sound scary, but any homeowner with a mortgage has one.
Then there are involuntary liens, which can be frightful. Think tax liens, mechanic’s liens, creditor and child support liens.
What Is a Mortgage Lien?
Mortgage liens are part of the agreement people make when they obtain a mortgage. Not all homebuyers can purchase a property in cash, so lenders give buyers cash upfront and let them pay off the loan in installments, with the mortgage secured by the property, or collateral.
If a buyer stops paying the mortgage, the lender can take the property. If making monthly mortgage payments becomes a challenge, homeowners would be smart to contact their loan servicer or lender immediately and look into mortgage forbearance.
Mortgage liens complicate a short sale.
They will show up on a title report and bar the way to a clear title.
Recommended: Tips When Shopping for a Mortgage
Types of Mortgage Liens
Generally, there are two mortgage lien types: voluntary and involuntary.
Homeowners or homebuyers agree to a voluntary, or consensual, lien when they sign a mortgage. If a homeowner defaults on the mortgage, the lender has the right to seize the property.
Voluntary liens include other loans:
Voluntary liens aren’t considered a negative mark on a person’s finances. It’s only when they stop making payments that the lien could be an issue.
On the other side of the coin is the involuntary, or nonconsensual, lien. This mortgage lien type is placed on the property without the homeowner’s consent.
An involuntary lien could occur if homeowners are behind on taxes, HOA payments, or mortgage payments. They can lose their property if they don’t pay back the debt.
Property Liens to Avoid
Homeowners will want to avoid an involuntary lien, which may come from a state or local agency, the federal government, or even a contractor.
Any of the following liens can prohibit a homeowner from selling or refinancing property.
A judgment lien is an involuntary lien on both real and personal property and future assets that results from a court ruling involving child support, an auto accident, or a creditor.
If you’re in this unfortunate position, you’ll need to pay up, negotiate a partial payoff, or get the lien removed before you can sell the property.
Filing for bankruptcy could be a last resort.
A tax lien is an involuntary lien filed for failure to pay property taxes or federal income taxes. Liens for unpaid real estate taxes usually attach only to the property on which the taxes were owed.
An IRS lien, though, attaches to all of your assets (real property, securities, and vehicles) and to assets acquired during the duration of the lien. If the taxpayer doesn’t pay off or resolve the lien, the government may seize the property and sell it to settle the balance.
If a property owner in a homeowners association community is delinquent on dues or fees, the HOA can impose an HOA lien on the property. The lien may cover debts owed and late fees or interest.
In many cases, the HOA will report the lien to the county. With a lien attached to the property title, selling the home may not be possible. In some cases, the HOA can foreclose on a property if the lien has not been resolved, sell the home, and use the proceeds to satisfy the debt.
If a homeowner refuses to pay a contractor for work or materials, the contractor can enforce a lien. Mechanic’s liens apply to everything from mechanics and builders to suppliers and subcontractors.
When a mechanic or other specialist files a lien on a property, it shows up on the title, making it hard to sell the property without resolving it.
Lien priority refers to the order in which liens are addressed in the case of multiple lien types. Generally, lien priority follows chronological order, meaning the first lienholder has priority.
Lien priority primarily comes into play when a property is foreclosed or sold for cash. The priority dictates which parties get paid first from the home’s sale.
Say a homeowner has a mortgage lien on a property, and then a tax lien is filed. If the owner defaults on their home loan and the property goes into foreclosure, the mortgagee has priority as it was first to file.
Lien priority also explains why lenders may deny homeowners a refinance or home equity line of credit if they have multiple liens to their name. If the homeowner were to default on everything, a lender might be further down the repayment food chain, making the loan riskier.
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How to Find Liens
Homeowners or interested homebuyers can find out if a property has a lien on it by using an online search. Liens are a public record, so interested parties can research any address.
For a DIY approach:
• Search by address on the local county’s assessor or clerk’s site.
• Use an online tool like PropertyShark.
Title companies can also search for a lien on a property for a fee.
If sellers have a lien on a property they’re selling, they’ll need to bring cash to the closing to cover the difference. If the seller doesn’t have enough money, the homebuyer is asked to cover the cost, or they can walk away from the deal.
How Can Liens Affect Your Mortgage?
An involuntary lien can affect homeowners’ ability to buy a new home, sell theirs, or refinance a mortgage. Lenders may deem the homeowner too big a risk for a refinance if they have multiple liens already.
Or, when homeowners go to sell their home, they’ll need to be able to satisfy the voluntary mortgage lien or liens at closing with the proceeds from the sale. If they sell the house for less than they purchased it for or have other liens that take priority, it may be hard to find a buyer willing to pay the difference.
Liens can also lead to foreclosure, which can impede a person’s chances of getting a mortgage for at least three to seven years.
How to Remove a Lien on a Property
There are several ways to remove a lien from a property, including:
• Pay off the debt. The most straightforward approach is to pay an involuntary lien, or pay off your mortgage, which removes the voluntary lien.
• Ask for the lien to be removed. In some cases, borrowers pay off their debt and still have a lien on their property. In that case, they should reach out to the creditor to formally be released from the lien and ask for a release-of-lien form for documentation.
• Run out the statute of limitations. This approach varies by state, but in some cases, homeowners can wait up to a decade and the statute of limitations on the lien will expire. However, this doesn’t excuse the homeowner from their debt. It simply removes the lien from the home, making it easier to sell and settle the debt.
• Negotiate the terms of the lien. If borrowers are willing to negotiate with their creditors, they may be able to lift the lien without paying the debt in full.
• Go to court. If a homeowner thinks a lien was incorrectly placed on their property, they can file a court motion to have it removed.
Before taking any approach, you might consider reaching out to a legal professional or financial advisor to plan the next steps.
Mortgage liens can be voluntary and involuntary. Many homeowners don’t realize that the terms of their mortgage include a voluntary lien. It’s involuntary liens they would be smart to avoid.
Mortgages can be complicated, but SoFi is here to make things simple. If you need a mortgage on a primary home or investment property, a jumbo loan, a refinance, or home equity loan, get pre-qualified painlessly with SoFi.
What type of lien is a mortgage?
A mortgage lien is a voluntary lien because a homeowner agrees to its terms before signing the loan.
Will having a lien prevent me from getting a new loan?
Some liens can keep people from getting new loans. Lenders are unlikely to loan applicants money if they have multiple liens.
Is it bad to have a lien on my property?
A mortgage lien is voluntary and not considered bad for a borrower. But an involuntary lien prohibits owners from having full rights to their property, which can include selling the home.
How can I avoid involuntary liens?
Homeowners can avoid involuntary liens by staying up to date on payments, including property taxes, federal income taxes, HOA fees, and contractor bills.
Can an involuntary lien be removed?
Yes, an involuntary lien can be removed in several ways, including paying off the debt, filing bankruptcy, negotiating the debt owed, and challenging the lien in court.
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