Mortgage Liens: Defined And Explained

If you took out a mortgage to buy your home, you’re probably familiar with the concept of a lien — you have one on your property until your loan is fully paid off.

While the term might sound like legal jargon, a lien is simply a way for someone who’s owed money to make sure they get paid.

Let’s break it down further and explore exactly what liens are and how they work.

What Is A Lien?

A lien is a legal claim on property used as collateral to repay a debt. Depending on the type of debt, liens can apply to real property, like a home, or personal property, like a car or furniture. In simple terms, it means someone has a financial interest in your property until you’ve fully paid off the debt you owe.

For example, a mortgage or property tax lien is tied to the real estate associated with the loan or unpaid taxes. Similarly, personal property, like a car, may have a lien if the owner is still paying off the auto loan used to buy it. Judgment liens, however, can apply to both real estate and personal property.

What Is A Mortgage Lien?

If you take out a mortgage to buy a home, you hold the title to the property, meaning you’re the legal owner. However, because you borrowed money from the lender, they place a lien on your home. This makes your mortgage both a voluntary and specific lien.

As long as you make your monthly mortgage payments, the lien doesn’t affect you. Once you fully repay the mortgage — either at the end of the loan term or through the sale of your home — the lender will remove the lien.

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.

Types of Mortgage Liens

General Vs. Specific Lien

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.

Voluntary Vs. Involuntary Liens

It’s also important to understand the difference between voluntary and involuntary liens.

With voluntary liens, the property owner initiates the lien, usually to secure a loan. For example, a mortgage is a voluntary lien because the homeowner agrees to let the lender place a lien on the property as part of the terms of the mortgage.

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

How Mortgage Liens Operate

When you take out a mortgage to finance the purchase of a home, the lender places a lien on the property you're buying as collateral for the loan. This way, if you default on your payments, the lender can take action.

Before finalizing your mortgage, your lender will do a title search to make sure the property has no existing liens, such as unpaid taxes or other claims. Conducting a title search is essential so the lender can confirm that the property is free and clear of legal issues. This ensures that you, as the buyer, will own it without other financial obligations (besides the mortgage).

If your lender discovers there is a lien on the property, it must be cleared before the lender will move forward with approving the mortgage.

Once you repay your mortgage, the lien is removed. At that point, your lender will provide a document, sometimes called a “lien discharge” or "satisfaction of mortgage," which proves that the debt has been paid off. In other words, the property is officially yours and no longer subject to a lien from your lender.

How Do I Find Out If There's A Lien On My Property?

When you start the mortgage process, lenders will order a title search to be completed. This search shows if there are any liens attached to the property’s title. If lenders find that a property has outstanding liens, they won’t approve your mortgage.