What is a lien and how does it work?

Though it might sound like some complex legal jargon, a lien is essentially a legal tool used by those who are owed money to ensure that they’re paid back.

If you used a mortgage to purchase your home, you might already know what a lien is, since you’ll have a lien on your property until you pay off the mortgage loan.

Let’s take a closer look at exactly what liens are and how they work.

What is a lien?

A lien is a legal claim against property that can be used as collateral to repay a debt. Depending on the type of debt owed, liens can be attached to real property, such as a home, or personal property, such as a car or furniture.

Examples of a lien

Mortgages or property tax liens are attached to the real property on which the mortgage or taxes are owed. Personal property such as a car might have a lien on it if the owner is still paying off the auto loan they used to purchase the vehicle. Judgment liens can generally be attached to both real and personal property.

How do liens work?

When thinking about liens, it’s important to make a distinction between a general lien and a specific lien.

• General liens: A general lien allows a creditor to seize any and all of your assets to pay a specific debt. For example, if you own a primary residence and a vacation home, the Internal Revenue Service (IRS) can put a general lien on both properties until the debt is paid off.
• Specific liens: A specific lien – like a mortgage – only allows the creditor to seize a property designated in the agreement. If you fail to make payments on your vacation property, your lender can only seize the vacation property and can’t foreclose on your primary residence.

This is part of the reason why mortgages for second homes tend to require a larger down payment and better credit than a mortgage for a primary residence.

Another distinction that should be made when discussing types of liens is voluntary liens versus involuntary liens.

Voluntary liens are permitted by the owner of a property in order to secure a loan. A mortgage agreement is a voluntary lien because the homeowner agrees to grant the lender a lien as part of the terms of the mortgage.

On the other hand, involuntary liens are typically the result of failing to pay someone you owe a debt to. With these types of liens, you don’t have to agree to have the lien recorded on your property.

Types of liens on a property

If you own a home or another type of property, there are different types of liens that you may encounter, each with its own purpose and circumstances for use. The rule of lien priority states that the first in line gets paid first.

Mortgage lien

Suppose you get a mortgage to purchase your home. You hold title to your home, meaning you’re the legal owner of the property. But because you owe your mortgage lender the money they loaned you to buy your house, they’ll put a lien on the property. That makes your mortgage a voluntary lien and a specific lien.

As long as you make your monthly mortgage payments, the lien won’t come into play. The lender will remove the lien once you finish paying it off, either at the end of your mortgage term or by using the proceeds from the sale of the home.

However, if you stop making payments on your mortgage, the lender may eventually begin foreclosure proceedings.

When filed against your real property, a lien gives the lien holder the ability to foreclose on your home. Because liens are placed on property, which are an illiquid type of asset, lien holders have the ability to force the sale of the property to satisfy the debt.

Bank lien

A bank lien is a type of general lien and a voluntary lien. When you borrow money from a bank to make a large purchase, you can secure the loan with collateral.

For example, you may use a car to secure a car loan. In the event that you default on the loan, the bank lien allows the lender to collect and sell the car to recoup the loss.

Mechanic’s lien

Another type of involuntary lien, a mechanic’s lien guarantees payment to a builder for a property’s construction or renovation. If a contractor or subcontractor completes work on your home and you don’t pay them, they can file a mechanic’s lien on your property.

Judgment lien

A judgment lien is another type of involuntary lien that’s the result of a court judgment against you. If you owe someone money and refuse to pay, they can sue you.

If the court rules in their favor, they can file a judgment lien on your real property and, in many cases, any personal property you own. Judgment liens can also attach to a property you acquire after filing the lien.

Income and property tax liens

If you owe your local, state or federal government money, they can put a lien on your property. This type of general and involuntary lien can happen if you don’t pay your income taxes or property taxes.

How do I find out if there's a lien on my property?

When borrowers embark on the mortgage process, lenders will order a title search to be completed. This search will show if there are any liens attached to the property’s title. If lenders see that a property has outstanding liens, they won’t approve the mortgage for the borrower.

Can I sell my house if there’s a lien on it?

If you’re looking to sell your house with a lien on it, you’ll most likely have to pay off the debt associated with the lien before you can move forward with selling your house, or negotiate for the lien to be paid directly from the proceeds of the home sale.

What if there are multiple liens on my home?

If you have more than one lien on your property, those lien holders will also be in line to receive some of the proceeds from your home’s sale. Once your mortgage lender or any other senior lien holders are paid, they’ll also receive what they're owed.

How do you remove a lien?

To have a lien removed from your property, you’ll typically have to convince the lien holder to remove it – most often, by paying them. However, that may not be the only option available to you. If you have a lien on your home, you can:

• Pay off the lien: The best way to make a lien disappear is to pay back the lien holder. Be sure to confirm that the lien has been removed.
• Negotiate the lien: If you can’t pay back the lien holder in full, you may be able to negotiate a partial payment or a payment plan in exchange for a lien release.
• Dispute the lien: If the lien isn’t valid, you can go to court and ask for a court order to have the lien removed. You’ll need to provide evidence to back up your claims that the lien is invalid.

If you have title insurance, you can also file a claim with your insurer to have the lien resolved.

The bottom line: What does a lien mean for you?

Remember, not all liens are bad. As long as you pay your monthly mortgage payments, for example, your mortgage lien probably won’t have too much of an effect on your daily life.

However, many types of liens do put your property at risk, so it’s important to get them resolved as soon as possible. Even if the lien holders decide not to foreclose, these liens can make it impossible for you to sell your home or refinance your mortgage.

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