Understanding Mortgage Liens: What Homebuyers and Owners Need to Know

A Comprehensive Guide to Mortgage Liens and Their Implications / Nansan Houn via Getty Images

A mortgage lien serves as a legal claim placed by a lender on a property, giving them the right to take possession of the property if the borrower defaults on their home loan. When you obtain a mortgage, you consent to this lien, which acts as security for the lender, ensuring that they can recoup their investment in case of non-payment.

To simplify, a mortgage lien represents a lender’s financial interest in your property. If you have not fully repaid your mortgage, this lien remains on your home, treating the property as collateral to safeguard the lender's investment should you fail to meet your payment obligations.

Types of Mortgage Liens: First-Lien vs. Second-Lien Mortgages

Mortgage liens can be classified into two main categories: first-lien and second-lien mortgages. The critical distinction between these two is the priority of claims in the event of a default. A first-lien mortgage holds primary claim over the property, meaning that in the case of foreclosure, this lender will be compensated first from the proceeds of the sale. Conversely, second-lien mortgages, which might include home equity lines of credit (HELOCs) or additional loans taken after the primary mortgage, are subordinate to first-lien mortgages. As a result, second-lien holders are only paid after the first-lien lender has been compensated.

In most cases, the mortgage taken to finance the purchase of your home is categorized as a first-lien mortgage. Any subsequent borrowing against the home, such as a HELOC or home equity loan, constitutes a second-lien mortgage. Therefore, if foreclosure occurs, the sale proceeds are first allocated to the primary mortgage lender, followed by any second-lien holders.

Broader Categories of Property Liens

Liens fall into various categories, primarily voluntary versus involuntary and general versus specific.

1. Voluntary Liens vs. Involuntary Liens

   • Voluntary Liens: These are liens you accept willingly, such as those associated with your primary mortgage or HELOC. By signing the mortgage agreement, you agree to the lender's right to your property if you default on the loan.
   • Involuntary Liens: Imposed without your consent, these liens often arise from unpaid debts, like property tax liens due to tax non-payment.

2. General Liens vs. Specific Liens

   • General Liens: These can affect all of your properties rather than a specific asset. For example, if you default on multiple debts, creditors may pursue claims on your entire estate, including your home and other assets.
   • Specific Liens: These are attached to particular properties. A mortgage lien is a specific lien because it is directly associated with the home that secures the loan.

Additional Types of Property Liens

Beyond mortgage liens, several other types of liens can be placed on your property, potentially complicating ownership:

• Contractor Liens: Also known as mechanics' liens, these can be filed by contractors or subcontractors who have completed work on your property but have not been compensated. This type of lien grants them a legal claim to your property until the debt is settled.

• Judgment Liens: If a creditor wins a court judgment against you, they can secure a judgment lien on your property, allowing them to seize it if you do not repay the owed amount.

• Homeowners' Association (HOA) Liens: If you live in an HOA community and fail to pay dues, the association can place a lien on your property to recover unpaid fees.

• Federal Tax Liens: The government can file a claim against your property if you owe federal taxes.

• Property Tax Liens: Local governments can impose a lien on your home for unpaid property taxes, asserting their right to recover the debt.

Impacts of Liens on Homeowners and Buyers

Liens can significantly affect homeowners, especially regarding selling or refinancing properties. Most potential buyers prefer homes with clear titles, and lenders may hesitate to finance a home that is at risk of foreclosure due to outstanding liens. In extreme situations, unresolved liens may lead to forced sales, where the property is sold to satisfy the outstanding debt. Although liens typically do not appear on credit reports, failing to pay debts linked to a lien can adversely affect your credit score.

For homebuyers, discovering property liens during a title search can delay the purchasing process, requiring resolution of the liens before proceeding with the sale. If the seller is unable or unwilling to clear the debt, the transaction could be indefinitely stalled.

Removing a Mortgage Lien or Other Property Liens

If you find yourself facing a property lien, whether it’s a mortgage lien or another type, there are ways to eliminate it:

• Pay Off the Debt: The simplest method to remove a lien is to pay off the associated debt. Contact the lien holder to determine the exact amount owed.

• Negotiate: If you cannot afford to pay the full amount, consider negotiating with the lien holder. They may agree to accept a reduced amount in exchange for lifting the lien.

• Dispute the Lien: If you believe a lien has been improperly placed, you can challenge it through the courts, providing evidence to support your case.

Common Questions About Mortgage Liens

• Why might there be no liens on my mortgage? If no liens exist on your property, it likely means you have fully paid off your mortgage. To confirm, check with your county recorder of deeds or local Secretary of State to ensure the lien has been officially released.

• What is the most prevalent type of lien on properties? Mortgage liens are among the most common, giving lenders rights to the property in case of default. Other frequent types include federal tax liens, property tax liens, HOA liens, and judgment liens.

• Who can place a lien on your home? A wide range of parties, including mortgage lenders, contractors, suppliers, creditors, homeowners' associations, and government entities, can file liens against your property if you owe them money.