When you receive a home loan, your lender places a mortgage lien on your property to get their owed money if you don’t repay the loan. There are many other types of lien that you may encounter that could impact you and your finances, too. Let’s look at how mortgage liens work and how they can affect your loan.
What Is A Mortgage Lien In Real Estate?
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. Although we’re focusing specifically on homes in this article, you could also have a lien on your car or another possession that you pay off over time.
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: your mortgage.
How Does A Mortgage Lien Work?
A mortgage enables you to afford a house over time instead of paying for the entire cost upfront in cash. It gives many of us something to lean on in order to get a permanent place to put our roots down 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 payments, the collateral never comes into play.
Mortgage Lien Types
All liens fall under two fundamental categories: general or specific liens and voluntary or involuntary liens.
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.
A general lien is a claim on all your property assets, including real estate and personal property (e.g., house, bank accounts, cars, etc.). When you owe the IRS taxes, they can apply a claim on all of your property, not just your house, with a general lien.
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 also either voluntary or involuntary – meaning you either agreed to it or it was put there against your will.
With a voluntary lien, the property owner gives consent 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 types of voluntary and specific liens is a mortgage, because a borrower freely enters into it.
An involuntary lien is a claim placed on the 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 the obligations aren't paid.
Property Liens To Avoid
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
Judgement 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 the debt.
A default judgement may be placed against you if you fail to appear in court to resolve an owed debt. A deficiency judgement is another type of judgement lien that could be used to seize more of your property if what was already taken is not enough to satisfy an owed debt.
Tax Liens
If you haven’t paid your taxes in a while, the government can also choose to put a lien on your property until you’re current on your payments. There’s an added wrinkle with tax liens.
While most creditors will 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 on and sell your property, if you continue to fail to make the payments.
Like many others, these liens may also impede your ability to sell a property, and they show up on your credit report. Although it’s probably not going to lead to foreclosure, 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 dues, odds are the association will send you letters and assess late payment fees. If that doesn’t work, it may have the power to place a lien on your property based on bylaws or even progress to foreclosure. The association may not want to go this route, though, as it would have to pay the property taxes.
How Liens Can Affect Your Mortgage
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.
In order to get a new mortgage of any kind, you’ll have to pay off your lien. Depending on the type of loan, this will either have to be paid before the time you apply for a mortgage or at closing. Additional documentation will be required to prove payoff in some cases. The one exception to the above is that certain new 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 they get to that point.
If your home does end up going into foreclosure, you usually won’t be able to get another FHA or VA loan for at least 3 years. If you’re looking at conventional loans through Fannie Mae or Freddie Mac, you would have to wait at least 7 years after the foreclosure. You wouldn’t have any mortgage options for the first year after the foreclosure. In any case, this is something you should really try to avoid.
How To Find Mortgage And Property Liens
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 the 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 for you to discover any outstanding liens on the property. You’d usually only do this if you’re ready to get a mortgage, however, since it’s something you’ll have to pay for.
Conclusion
Mortgage liens aren’t always negative for a homeowner. In some cases, a lien is simply a claim to a property or asset as a way for a lender to protect themselves and regain some of their losses if the borrower doesn’t repay their debts. A mortgage on a home is a good example of this. However, some mortgage liens can impact your credit score or even enable a lender to seize your property, so it’s important to talk to your lender if you have concerns and get them cleared as soon as possible.