What is a lien and how does it work?

A lien is a legal claim that exists against a person or piece of property. In the world of real estate, it typically refers to claims against a property, such as a home. While a lien doesn’t grant ownership, it represents a debt obligation that should be addressed. There are many different types of liens. Some, like mortgage liens, are very common while others like tax liens, are rarer and can have more severe consequences.

Understanding how liens work is essential for protecting your property and your finances. This guide will explain what liens are, how they work, and how you can remove them.

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

Liens can come in many forms, but all represent a claim against a property. The type of lien that gets placed will depend on who places the lien and why they are placing it.

These are some common types of liens you might see.

• Mortgage lien: These are common in real estate and represent the lender's interest in the property serving as collateral.
• Property tax lien: Local governments can place liens for unpaid property taxes to ensure they get the taxes they’re owed.
• Personal property lien: If you own a car and still have an auto loan, the lender may have a personal property lien on your car.
• Judgment lien: A judge can place a lien on your property if you are subject to a court ruling, such as a finding that you’re liable to pay for damages you caused to another person or their 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, allows the creditor to seize only a property designated in the agreement. If you fail to make payments on your vacation property, your lender can seize only the vacation property and cannot 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 foreclosureproceedings.

When filed against your real property, a lien gives the lienholder the ability to foreclose on your home. Because liens are placed on property, which is an illiquid type of asset, lienholders 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 the 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.

Depending on where you live, the government may be able to begin the foreclosure process or initiate a tax sale of your property after a few years of unpaid taxes. If you fail to get current on your bills, you could lose your home.

Finding liens on your property

Typically, when you’re buying a home, a search for liens is a standard part of the process. Your lender 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.

If you want to look for liens on your own, you can check with your county recorder’s office, which should have real estate records, including a list of all liens and transactions involving a property. You can also consider online search tools or hiring a title search company to assist.

Selling a home with a lien on it

If you’re looking to sell your house with a lien on it, you will likely have to resolve it during the closing process and will typically be paid from the sale proceeds. Most lenders require a clear title, meaning that the house cannot have liens against it in order for the loan to go through. In some cases, cash buyers may agree to purchase the house with liens.

Voluntary liens, like your mortgage or home equity loan, won’t be a problem at all. You’ll be paying off those loans as part of the closing process, so they won’t affect things.

Involuntary liens, like tax liens or disputes from contractors, could cause some problems. The easiest solution is to pay off the debts causing those liens.

What if there are multiple liens on my home?

Liens on your home are assigned priority based on when the liens were placed and the laws in your state. If you sell your home, those lien holders will be in line to receive some of the proceeds from your home’s sale.

First and second liens are considered senior forms of debt, giving them the highest priority when it comes to getting paid. Mortgages, home equity loans, and HELOCs are typically first and second liens.

Other types of liens are a lower priority than senior liens, so if you sell your home or default on your mortgage, they will get paid only after the first and second liens are handled.

How do you remove a lien?

To have a lien removed from your property, you have several options:

• 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 lienholder 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?

A lien is a legal claim on a piece of property. For example, your mortgage lender will place a lien on your property to help ensure it gets paid for the money it lent you. However, some liens, like tax liens, can represent a major problem that you need to resolve. Understanding the different types of liens and keeping track of them is an important part of owning property.

If you’re ready to begin looking for a home, you can start a mortgage application with Rocket Mortgage today.