Heard the term “lien” thrown around in the context of real estate, but not sure what a lien on property is?
Fear not. Despite the official definition being in legalese, liens are actually quite simple. Here’s what you need to know about real estate liens — including how to remove them.
What Is a Lien on Property?
A lien is a legal claim to your property in the event you default on a payment.
In other words, a lien against your property makes it collateral in case you default.
The most common example lies in mortgage loans. When you take out a mortgage, the lender places a lien against your property in your county’s public records. You signed this document at the settlement table, called either the “Mortgage Note” or the “Deed of Trust.”
It gives the lender the right to repossess the collateral — your property — if you default on your payments. You know this process as foreclosure.
Lenders can record liens against other types of property too, not just real estate. For example, when you take out a car loan, the lender places a lien on your car as the collateral for the loan. If you stop paying, they repossess your car.
How Real Estate Liens Work
A lien gives a creditor the legal right to collect their debt by repossessing or forcing the sale of your property.
When you borrow a secured loan, such as a mortgage or car loan, you voluntarily sign a deed of trust or mortgage document to place the lien against your property. That secured collateral is precisely why you can borrow money cheaply: the lien protects the lender in the event of default.
However, in some cases, creditors can place liens on your property against your will. If you fail to pay your taxes, for instance, the IRS can place a tax lien on your property to recover what you owe. More on the different types of liens shortly.
When you go to sell a property, you must repay all debts secured with a lien against it. Otherwise, the property can’t convey to the new owner with a clean title history.
Finally, note that liens appear in a title search on your property, but not on your credit report. Judgments do appear on your credit report however, and damage your credit score.
Lien Order & Priority
Imagine someone has two mortgages and a HELOC against a property, and they default. Which lenders get paid first?
For any given property with multiple liens, there’s a priority order. In most cases, liens are ordered chronologically. The first lien recorded gets first priority, the second lien gets second priority, and so forth.
If you default and the property goes to foreclosure, the money goes toward paying off the lender in first lien position. If there’s any money left over after that, it goes to the lender in second lien position. And so it goes, and if any proceeds remain after paying off all creditors, you get them.
But as in everything else, the government can do whatever it wants and jump the line to get paid first if they secure a tax lien against you. Uncle Sam always wins in the end.
Interest on Judgments & Liens
While mortgage lenders nearly always foreclose if you default on your monthly payments, most other lienholders rarely go through the hassle of foreclosing.
Instead, they wait for you to come to them. They know you have to when you want to sell your property.
And when you do come to them asking for a payoff quote, they charge you interest for all the years or decades that you owed an outstanding balance.
The maximum interest rate that judgment holders can charge varies by state. On the low end, New Jersey only allows 3.5% per year, while creditors can charge up to 12% in Vermont, Massachusetts, Rhode Island, and Washington.
Types of Real Estate Liens
As outlined above, there are many types of liens on property. Here are a few of the most common liens against real estate you’ll encounter.
As the most common lien against real property, homeowners and real estate investors voluntarily agree to mortgage liens when they borrow money against a property.
In fact, the lien is the very thing that makes the loan “against a property.”
You own the property, but the bank can foreclose to force the sale if you default on your loan payments. It works the same whether you borrow a homeowner mortgage or a rental property loan and whether you borrow from a hard money lender, a conventional lender, or a portfolio lender.
When you take out a home equity line of credit (HELOC), it works as a rotating line of credit, similar to a credit card. You can pull money from it at any time, and repay it on your own schedule, plus interest of course.
But while most credit cards are unsecured, HELOCs come with a lien on your property. You sign a deed of trust, putting your property up as collateral. It’s precisely why HELOCs come with such lower interest rates than unsecured credit cards.
Note that you can take out a HELOC against a rental property, not just against your primary residence. Check out Figure as a fast, flexible HELOC lender that works with landlords too, not just homeowners.
The taxman cometh — for your home, if you don’t pay them what they think you owe.
Unlike mortgage loans and HELOCs, the government can record an involuntary lien against your property. You don’t need to voluntarily agree to it or sign any legal documents.
Nor is it only the federal government that can attach tax liens on your property. State and local governments can do it too, for unpaid taxes ranging from income taxes to property taxes.
Word to the wise: pay your taxes in full and on time. Go ahead and take every possible rental property deduction, take full advantage of real estate depreciation, and use every other legal option to avoid capital gains taxes and income taxes. But if you bend the rules with Uncle Sam, he’ll bend you to the breaking point.
If someone sues you in court and wins, the judge awards them a money judgment. They can then file to secure that judgment as a lien against your home, investment properties, or other assets.
From there, they can foreclose to force the sale and recover their money. That said, judgment holders rarely foreclose, because it costs so much money, and there would have to be enormous equity in the property for them to collect money after paying off any mortgage balances.
And yes, if you lose a landlord lawsuit, the plaintiff can attach their judgment as a lien, just like any other judgment.
In addition to putting a lien on your property, judgment holders can also garnish your wages or go after your personal property. That includes your vehicles, second homes, boats, jewelry, and other personal assets.
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When a property owner fails to pay a contractor for their work, they can take the homeowner or landlord to court over it and secure a mechanic’s lien against the property.
Just as with any other lien, the contractor can foreclose if they wish. But like judgment lien holders, they rarely do. Instead, they usually wait until the property owner goes to sell, then collect their balance.
While you have many options to deal with bad contractors, simply refusing to pay their bills isn’t one of them.
Homeowners’ associations or condo associations can also place a lien against your property if you violate their bylaws or fail to pay your dues. And like other lienholders, they can opt to file foreclosure proceedings, but rarely do.
Make sure you understand exactly what you’re getting yourself into before buying a property governed by a homeowner’s association or condominium association.
How to Remove a Lien
The easiest way to remove a lien is, of course, to simply repay the debt in full.
When you pay off your mortgage in full, the lender files a lien release with your county recorder to remove the lien against your property. If you pay the bill to a contractor who placed a mechanic’s lien on your property, make sure they file a similar lien release.
But everything in life is negotiable. Before writing a check, make a lowball offer to settle the debt. Make it clear that you have no intention of selling the property — otherwise, they’d know they have you over a barrel — but that you’re looking to clean up your credit history.
Alternatively, you can file in court to remove a lien if you feel that it is erroneous or that the lienor didn’t follow legal procedures in its recording. If the lienor used bad faith, fraud, or coercion in any way, you can take them to court to remove the lien.
Judgments and some liens can also expire, based on their statute of limitations. You could potentially just wait them out, if you don’t mind holding the property and collecting rents and cash flow.
Lastly, you could declare bankruptcy. But in doing so, secured liens don’t just disappear. If you declare a Chapter 7 bankruptcy (liquidation), the court can order you to sell properties to satisfy the liens. Unsecured judgments do typically disappear, however. In a Chapter 13 bankruptcy, the court simply works out a new payment plan for you to pay off the debts.
What is a real estate lien? The legal attachment of a debt to your property.
While they usually happen with your consent, in the case of a mortgage loan or HELOC, other people, companies, and governments can place liens on your property without your consent if you fail to pay them what you legally owe. Title companies require you to pay off all liens before you can legally transfer title to a buyer.
Pay your debts or watch your creditors come after your property.♦
Have any questions beyond “What is a lien on property?” What else do you want to know about real estate liens?
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About the Author
G. Brian Davis is a landlord, real estate investor, and co-founder of SparkRental. His mission: to help 5,000 people reach financial independence by replacing their 9-5 jobs with rental income. If you want to be one of them, join Brian, Deni, and guest Scott Hoefler for a free masterclass on how Scott ditched his day job in under five years.