Mortgage lien: What They Are and How They Work

Key Points

• Mortgage liens are legal claims on property securing a mortgage.

• Property rights can be general or specific and voluntary or involuntary. The right to mortgage is express and voluntary.

• The priority of liens on a property determines which lien will be paid first in the event of default and foreclosure.

• The best way to avoid unnecessary liens on your property is to pay your debts on time.

Mortgage loans are an integral part of the home-buying process. A lien is a financial claim on your property, allowing the lender to take possession of the home if you default. Here's how mortgage liens work, the difference between voluntary and involuntary liens, and how to ensure your mortgage lien doesn't become a problem.

What is a lien?

A lien is a legal claim on your property that acts as security (or security interest) for your mortgage. If you default or stop making payments on your mortgage, the lender can take possession of your home and sell it to collect the outstanding loan. A lien is a safety net for the lender that gives you the money to buy your house.

Although they may seem negative, the right to a mortgage becomes homeownership for many people. If you make your mortgage payments on time each month, the lien won't prevent you from selling your home or refinancing your mortgage.

What is the difference between a lien and a mortgage?

Although "mortgage" and "lien" are often used interchangeably, they differ. A mortgage is a loan that allows a borrower to purchase a home over time, receive an advance payment from the lender, and then pay those amounts back with interest. A lien is a claim that allows a creditor to seize and sell collateral (for example, your home) to produce an unsatisfied debt. In the case of a mortgage, the lender is your lender.

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Types of mortgage liens

liens are classified as general or specific and voluntary or involuntary.

What is the difference between a general lien and a specific lien?

General liens are less standard than speciality liens. Key Differences:

• A general lien gives creditors the right to seize the permitted possession if payment terms are not met. For example, if someone doesn't pay their federal income taxes, the government can place a blanket lien on all their assets, including their home.

• Specific liens are attached to an asset and are typically used for larger loans, such as mortgages. For example, if you take out a mortgage for a vacation home, the lender will pay a lien on that specific property, not your primary residence.

What is the difference between voluntary and involuntary property liens?

There are also voluntary and involuntary rights over property. Here they compare:

• Voluntary liens on property are created through a mortgage agreement, which allows the lender to use the property as collateral for the loan.

• Involuntary liens are placed on property without your consent, usually due to unpaid debts. For example, if you can't pay your property taxes, your county or state taxing authority can place a lien on the property.

Can having an involuntary lien damage my credit score?

Undue liens won't damage your credit score. In 2017, all three credit bureaus (Equifax, Experian, and TransUnion) agreed to remove tax and judgment liens from your credit reports. The decision reflects that because liens can be held by more than one party, they often need to be more accurate and complete.

Are mortgage liens bad?

Having a mortgage lien is good if you keep making regular loan payments. All mortgage holders have a lien on the property. On the other hand, involuntary liens are placed on properties when owners can't pay their debts, such as property taxes. To sell your home, you'll need to liquidate these liens, which can be challenging if you can't pay the debt.

How do I remove an involuntary lien?

Here are some ways to avoid or get rid of unenforceable rights:

• Be current on all due payments or pay off the loan in full.

• Check your credit regularly to ensure no mistakes could result in an unnecessary lien.

• If you need help making payments, request a payment plan from the tax authority or creditor.

• If it is an incorrect entitlement, dispute it with the issuer.

• Hire a lawyer to resolve the disputed right.

• File for bankruptcy, which automatically wipes out some liens, such as a second mortgage (however, this should be an absolute last resort).

Those last two treatments can be expensive financially and concerning your credit. If you cannot afford to settle the debts, hiring a lawyer to resolve them is impossible. Likewise, bankruptcy comes with some filing fees and, more importantly, damages your credit, making it more challenging to get a loan in the future.

Once you've agreed to remove an unenforceable lien, there are usually a few additional steps to take to end it. For example, if you have paid off your loan, the lienholder must sign a lien release form and send it to the local government office. Depending on where you live, you may have to pay a small filing fee. Your lender may also charge a recovery fee to terminate the lien.

How do I know if there are any mortgages or liens on my property?

In most states, property owners can search for liens by providing the property address to the county recorder, clerk, or assessor's office. You can perform a lien search online for free, but you may need to pay a small fee to obtain a copy of the lien.

If you are selling your home, a title search will be performed to determine if there are any outstanding liens on your property. If there are, you must resolve the issue to remove rights before closing.

Read More: Secondary Mortgage Market: What it is and how it Works

Mortgage Lien FAQs

What are the other types of property liens?

There are many property liens, each with its purpose and restrictions. These include:

• Property tax lien: Your state or local government may issue a property tax lien for unpaid property taxes.

• Federal Tax Lien: The IRS can place a lien on your property for nonpayment of federal taxes. This lien can cover your personal property, other real estate assets, vehicles, and financial holdings.

• Homeowners Association (HOA) Lien: In most jurisdictions, your HOA can place a lien on your home if you don't pay your HOA fees.

• Mechanic's Lien: Contractors can place a lien on your home if you don't pay them for work they did on your property.

• Judgment lien: If you lose the case, the plaintiff can file a judgment lien until you pay the amount awarded to the plaintiff by the court. Debt collectors can also get a lien on your property for credit cards, outstanding medical bills, or personal loans.

What is the priority of entitlement?

The priority of liens on a property, sometimes called lien placement, indicates which lien will be paid first in the event of default and foreclosure.

When collateral, such as a home, is sold, the highest or first-priority creditor receives payment first, followed by the second-priority lien, and so on, until the money is exhausted. This means that creditors with fewer rights may only recover some of their losses or may be unable to recover their money.

A lien discount is money owed to the government, such as liens for federal and property taxes. It follows the "first in time, first in right" principle.

What is Lean Release? Lien release means that the lender or creditor removes or lifts the lien on the asset. This is when you pay off the loan. In the case of a mortgage, you will receive a mortgage settlement or repossession document when you pay off the loan and the loan is released.

Will the transaction prevent me from getting a new loan?

You may not be able to get a new mortgage (such as a refinance) or sell your home if there is a lien on the property. Most lenders will not lend on a house with outstanding debt.

The Bottom line

When you get a mortgage, the lender holds a lien on your home until you pay off the loan. This voluntary lien on the property represents the lender's claim on the house, giving them the right to foreclose if you stop making mortgage payments. If you continue to make your mortgage payments, this voluntary lien will not prevent you from selling your home. However, if you cannot pay some debt, you may have an involuntary property lien, such as a property tax or mechanic's lien. Unlike a voluntary lien, a foreclosure can hinder your ability to sell your home, so it's essential to address it.