Mortgage Lien: A Definition And Explanation

When you receive a home loan, your lender places a mortgage lien on your property. Once your mortgage is paid off, your lender removes the mortgage lien. There are many other types of liens you may encounter that could impact you and your finances. Let’s look at how mortgage liens work and how they can affect your loan.

A lien is a legal right that gives an individual or entity a claim to a collateral property until the outstanding debt is paid off. If the debt goes unpaid, the issuer of the lien has the right to take the property back from the borrower. If you have a mortgage, you’ll have a mortgage lien on your home until the loan is paid back in full. In this case, your home serves as collateral for your mortgage.

Although we’re focusing specifically on homes in this article, you could also have a lien on your car or another possession you pay off over time.

Are Mortgage Liens Bad?

It’s generally considered a negative thing if you have a lien on your home or property. However, lots of people have liens on their homes. In fact, the first type of lien on most houses is actually very helpful: It’s your mortgage.

There are also involuntary liens, though, which can be placed on your home in the event you fail to repay a debt, such as income or property taxes. A mortgage lien is not a result of a failure to pay, but what the lender receives in exchange for loaning you the money to buy your home. We’ll cover voluntary and involuntary liens in more detail later in this article.

A mortgage enables you to afford a house over time instead of paying the entire cost upfront in cash. It gives many of us something to lean on in order to get a permanent place, put down our roots and become part of a community.

When you have a mortgage lien, your house is used as collateral until you pay off the loan. As long as you keep making your monthly mortgage payments, the collateral never comes into play.

All liens fall under two fundamental categories: general or specific liens and voluntary or involuntary liens.

Let’s discuss the distinction between both categories and what each lien type entails.

General And Specific Liens

A lien can either be general or specific. These two different labels can tell you how a lien will impact you – specifically, the scope of your property it will affect.

General Liens

A general lien is a claim on all your property assets, including real estate and personal property (house, bank accounts, cars, etc.). When you owe the IRS taxes, they can apply for a claim on all your property, not just your house, with a general lien.

Specific Liens

In contrast, a specific lien is a claim on a particular piece of property or asset. For instance, a specific lien might be incurred when a property owner owes homeowners association (HOA) fees or late mortgage payments on a specific property. A mortgage on a home is an example of a specific lien.

Voluntary And Involuntary Liens

When you have a lien placed on your property, it is either voluntary or involuntary – meaning you either agreed to it or it was put there against your will.

Voluntary Liens

With a voluntary lien, the property owner consents for a claim to be placed on their property by the lender as collateral or security in exchange for repayment. This type of lien allows the lender to repossess the property and sell it if the owner doesn’t repay their debts. One of the most common specific, voluntary liens is a mortgage because the borrower freely accepts the lien.

Involuntary Liens

An involuntary lien is a claim placed on a property without the owner’s consent. In most cases, involuntary liens happen because of the property owner’s lack of action or inability to pay their debts, such as their mortgage payments or property taxes. A lender can place a claim on the property to warn the owner that they’ll lose legal ownership if their obligations aren't met, and their debts aren’t paid.

Beyond mortgages, you usually don’t want any other type of lien on your property. It’s important to know what liens you need to avoid or resolve as quickly as possible. If any debts aren’t satisfied by the time you sell your house, creditors can place liens that will cause trouble later.

Let’s look at some common liens you’ll want to stay away from.

Judgment Liens

Judgment liens are intended to compel borrowers to repay a debt. A creditor or an individual may sue you and win a judgment against you in court to gain the right to place a lien on your property until you satisfy a debt.

Default Judgment Vs. Deficiency Judgment

A default judgment may be placed against you if you fail to appear in court to resolve a debt. A deficiency judgment is another type of judgment lien that could be used to seize more of your property if what was already taken doesn’t satisfy the debt.

Tax Liens

If you haven’t paid your income or property taxes in a while, the government can also choose to put a lien on your property until you’re current on your payments – and there’s an added wrinkle with tax liens.

While most creditors wait until the property is sold to take a portion of the proceeds to pay off your debt, the IRS has the right to place a levy on your property, meaning they can foreclose and sell your property if you continue to fail to make your payments.

Like many other liens, tax liens may also impede your ability to sell a property, and could potentially lead to foreclosure on your home. You can also have a lien placed on your property if you fail to pay local property taxes.

Homeowners Association Liens

If you’re part of an HOA and don’t pay your dues, odds are the association will send you letters and assess late payment fees. If that doesn’t work, the HOA may place a lien on your property or even progress to foreclosure based on stipulations in its bylaws. However, the association may not want to take this route because it would have to pay the property taxes.

Mechanic’s Lien

A builder or contractor can file a mechanic’s lien if you fail to pay them after they supply labor or materials to improve your property. The lien will remain on your property until they get paid.

Mechanic’s liens could potentially be seen as voluntary liens, too, in the case of purchasing and installing solar panels on a home.

Not only can liens affect the sale of a property, but they can also impact your ability to buy a house or refinance your existing home.

Getting A New Mortgage

In order to get a new mortgage of any kind, you’ll need to pay off your lien. Depending on the type of loan you want, the lien must be repaid before you apply for the mortgage or at closing. Additional documentation will be required to prove payoff in some cases.

The one exception to the above scenario is that certain new Federal Housing Administration (FHA) loans may be granted if the lien is on a repayment plan. We recommend talking to a lender to see if this applies to you.

In some instances, you may have to reestablish credit for 12 months and have a letter of explanation for all liens and judgments.

Foreclosure

If you have a lien that could eventually turn into a tax or homeowners association foreclosure, it’s important to take care of these items before it gets to that point.

If your home does end up going into foreclosure, you usually won’t be able to get another FHA or Department of Veterans Affairs (VA) loan for at least 2 years. If you’re looking at conventional loans through Fannie Mae or Freddie Mac, you would have to wait at least 7 years after a foreclosure to take out a loan. You wouldn’t have any mortgage options the first year after foreclosure. In any case, this is something you should really try to avoid.

You can’t take care of your liens if you don’t know about them. So, how do you find them?

You could start by visiting the website of your county clerk or assessor. Usually, all you need to complete the search is a property owner's name and address. If your county doesn’t make records available online, you could always make a trip to the office and have the staff help you out in person.

You could also consider having a title company complete a title search if you think there may be a lien on a property. You’d usually only do this if you’re refinancing your mortgage, since by then you’re the owner of the property. Doing so could delay or derail the refinancing process, though.

Liens aren’t always negative for a homeowner. A mortgage on a home is a good example of this. Without this type of lien, home buyers wouldn’t be able to finance a property with a mortgage, and would instead need to have the cash to buy upfront, making homeownership much less accessible. However, involuntary liens can impact your credit score or cause a creditor to seize your property, so it’s important to talk to your lender if you have concerns about making your monthly mortgage payments on time. You should get any issues resolved as soon as possible.

Are you looking to buy or refinance a home? Start your mortgage application online with the Home Loan Experts at Rocket Mortgage^®.