Mortgage Liens: What Are They?
UPDATED: Dec 29, 2022
If you have remodeling work done, whether it’s adding solar panels or redoing a bathroom, you may have a lien placed on your house until the work is paid off. Once the conditions of the contract are satisfied, the lien can be removed.
This is just one situation in which liens play a role, but what exactly is a lien? How do liens work and how do you keep one from following you forever? We’ll use this article to answer all those questions. But let’s start from the beginning.
What Is A Mortgage Lien?
A lien is a property right someone has on your home or another piece of property. If for whatever reason you default on your payments or otherwise violate the terms of a contract, the lienholder has the option of taking your property back as compensation.
The most common type of lien is a mortgage. If you fail to make your house payments, the lender can take the home back and sell it to recoup their investment. A lien is appealing because it mitigates the risk of making a loan for the property that’s secured by the lien.
Although mortgage liens are most common, you can also have a lien for unpaid taxes, a judgment in a lawsuit or construction that’s being paid off.
How Does A Mortgage Lien Work?
Someone wishing to take out a lien against your property (whether that be real estate, a vehicle or something else entirely) would file paperwork with authorities in your county. There are two types of liens:
Consensual Lien: A consensual lien is one in which you get something of value in exchange for the lien being placed on your property, like a mortgage, line of credit or other type of loan.
Nonconsensual Lien: A nonconsensual lien is one that you don’t consent to in advance. These are either statutory in nature – related to the enforcement of a law – or imposed as part of a civil judgment.
The lien is removed once the loan is paid off or the requirements under the judgment or other type of lien are satisfied. We’ll get into exactly how this works in a little more detail later on.
Types Of Liens
There are several types of liens. We’ll go into how the major liens work, what they’re used for, and what it means if they’re issued to you.
Property Lien
The most common type of lien is a property lien. Property liens are based on the idea that your property is collateral for the loan. If you default on the loan, the lender can take your property to recoup their investment.
When dealing with home loans, something called lien position comes into play. When you buy a home, most people have a primary mortgage, unless you buy with cash. Things get a little more complicated if you have a second mortgage.
There are various reasons for doing this, but it’s a way of accessing equity in your home. However, the important thing to understand about a second mortgage is that the lienholder on that second mortgage would get paid after the primary lienholder. This makes the loan more risky for the lender who’s giving the second mortgage. There’s no guarantee that anything will be paid to the second-position lienholder in the event of a foreclosure or deed in lieu.
The lien position is directly tied to interest rates. Because there’s more risk with a second mortgage, you’ll pay a higher interest rate. For this reason, you can often get a better deal by refinancing your primary mortgage rather than taking on a second mortgage.
Tax Lien
The government can place a lien on your property if you have unpaid taxes. Unlike a traditional property lien, tax liens can apply to multiple pieces of property, such as a home, car or other piece of equipment. The lien doesn’t have to be tied to any one specific item.
The other important thing to know about tax liens is that it can affect your ability to qualify for other things. For example, you may or may not be able to qualify for a home loan based on whether you’re on a repayment plan or not.
Mechanic’s Liens
A mechanic’s lien is something that can be placed on your property if you have someone do work for you and that person doesn’t end up getting paid. Many states allow for mechanic’s liens. It can be removed after you work out an agreement or the work is paid for.
The person doing the work would file for a lien with the county and have the right to your property as collateral. They wouldn’t necessarily take your property, but if the home was ever sold, the contractor would be paid out of the proceeds.
Judgment Liens
A judgment can be entered against you by a court in your jurisdiction in a dispute. Once the judgment is rendered, someone can put a lien on your house or another piece of property.
Once the conditions in the judgement are satisfied, whether that’s payment or finished work, the judgment can be removed along with the associated lien.
Kevin Graham
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