Mortgage Liens: Defined And Explained

If you took out a mortgage to buy your home, you’re probably familiar with the concept of a lien — you have one on your property until your loan is fully paid off.

While the term might sound like legal jargon, a lien is simply a way for someone who’s owed money to make sure they get paid.

Let’s break it down further and explore exactly what liens are and how they work.

What Is A Lien?

A lien is a legal claim on property used as collateral to repay a debt. Depending on the type of debt, liens can apply to real property, like a home, or personal property, like a car or furniture. In simple terms, it means someone has a financial interest in your property until you’ve fully paid off the debt you owe.

For example, a mortgage or property tax lien is tied to the real estate associated with the loan or unpaid taxes. Similarly, personal property, like a car, may have a lien if the owner is still paying off the auto loan used to buy it. Judgment liens, however, can apply to both real estate and personal property.

What Is A Mortgage Lien?

If you take out a mortgage to buy a home, you hold the title to the property, meaning you’re the legal owner. However, because you borrowed money from the lender, they place a lien on your home. This makes your mortgage both a voluntary and specific lien.

As long as you make your monthly mortgage payments, the lien doesn’t affect you. Once you fully repay the mortgage — either at the end of the loan term or through the sale of your home — the lender will remove the lien.

However, if you stop making payments on your mortgage, the lender may eventually begin foreclosure proceedings.

Types of Mortgage Liens

General Vs. Specific Lien

When thinking about liens, it’s important to make a distinction between a general lien and a specific lien.

• General liens: A general lien allows a creditor to seize any and all of your assets to pay a specific debt. For example, if you own a primary residence and a vacation home, the Internal Revenue Service (IRS) can put a general lien on both properties until the debt is paid off.
• Specific liens: A specific lien – like a mortgage – only allows the creditor to seize a property designated in the agreement. If you fail to make payments on your vacation property, your lender can only seize the vacation property and can’t foreclose on your primary residence.

This is part of the reason why mortgages for second homes tend to require a larger down payment and better credit than a mortgage for a primary residence.

Voluntary Vs. Involuntary Liens

It’s also important to understand the difference between voluntary and involuntary liens.

With voluntary liens, the property owner initiates the lien, usually to secure a loan. For example, a mortgage is a voluntary lien because the homeowner agrees to let the lender place a lien on the property as part of the terms of the mortgage.

On the other hand, involuntary liens are typically the result of failing to pay a debt you owe. With these types of liens, you don’t have to agree to have the lien recorded on your property.

How Mortgage Liens Operate

When you take out a mortgage to finance the purchase of a home, the lender places a lien on the property you're buying as collateral for the loan. This way, if you default on your payments, the lender can take action.

Before finalizing your mortgage, your lender will do a title search to make sure the property has no existing liens, such as unpaid taxes or other claims. Conducting a title search is essential so the lender can confirm that the property is free and clear of legal issues. This ensures that you, as the buyer, will own it without other financial obligations (besides the mortgage).

If your lender discovers there is a lien on the property, it must be cleared before the lender will move forward with approving the mortgage.

How Do I Find Out If There's A Lien On My Property?

Can I Sell My House If There’s A Lien On It?

What If There Are Multiple Liens On My Home?

How Do You Remove A Mortgage Or Other Real Estate Lien?

To remove a mortgage or other real estate lien from your property, you'll typically need to convince the lien holder to release it. You can usually do this by paying them the amount you owe. However, that may not be your only option.

If you have a lien on your home, you can:

• Pay off the lien: The best way to make a lien disappear is to pay back the lien holder. Make sure to confirm that the lien has been cleared.
• Negotiate the lien: If you can't pay back the lien holder in full, you may be able to negotiate a partial payment or a payment plan in exchange for a lien release.
• Dispute the lien: If the lien isn't valid, you can go to court and ask for a court order to have the lien removed. You'll need to provide evidence to back up your claims that the lien is invalid.

If you have title insurance, you can also file a claim with your insurer to have the lien resolved.

Other Types Of Liens On A Property

In addition to your mortgage, there are other types of liens that you may encounter, each with its own purpose and circumstances for use. The rule of lien priority states that the first in line gets paid first.

Bank Lien

A bank lien is a type of general lien and a voluntary lien. When you borrow money from a bank to make a large purchase, you can secure the loan with collateral. For example, you may use a car to secure a car loan. In the event that you default on the loan, the bank lien allows the lender to collect and sell the car to recoup the loss.

Mechanic’s Lien

Another type of involuntary lien, a mechanic’s lien guarantees payment to a builder for a property’s construction or renovation. If a contractor or subcontractor completes work on your home and you don’t pay them, they can file a mechanic’s lien on your property.

Judgment Lien

A judgment lien is another type of involuntary lien that’s the result of a court judgment against you. If you owe someone money and refuse to pay, they can sue you. If the court rules in their favor, they can file a judgment lien on your real property and, in many cases, any personal property you own. Judgment liens can also attach to a property you acquire after filing the lien.

Income And Property Tax Liens

If you owe your local, state or federal government money, they can put a lien on your property. This type of general and involuntary lien can happen if you don’t pay your income taxes or property taxes.

Financial Impact Of Mortgage Liens

If you make your mortgage payments on time every month, the lien likely won’t impact your finances beyond the monthly payment. But if you run into financial trouble and miss payments, it could strain your finances. It might also complicate things if you decide to sell your home.

Consequences For Property Owners

Mortgage liens can cause issues such as:

• Impact on your credit score: While liens might not show up on your credit report, unpaid debts related to them can hurt your credit score. This could make it harder to get loans or lead to higher interest rates in the future.
• Increased financial burden: Putting off paying a mortgage lien can lead to extra fees and interest. This can make it even harder to pay off the debt.
• Risk of foreclosure: If your mortgage lien or property tax lien isn’t paid, your property could be taken and sold to cover what’s owed to your lender. For example, unpaid property taxes can lead to foreclosure. Remember that property tax liens usually take priority over mortgage liens, so both you and your lender could lose your home.

Consequences For Property Sales

Mortgage liens and other liens not only impact your financial situation but they can also make buying or selling property more challenging.

• Impact on sale proceeds: Selling a house with a lien can be difficult because the lien shows you still owe money. With mortgage liens, sale proceeds can go toward paying off the debt, but this means less profit. For example, let's say you owe $40,000 and sell your house for $400,000. In this case, $40,000 will go to the lienholder.
• Difficulty financing: A lien can make lenders hesitant to approve loans because it adds risk. You'll need to pay off the lien before selling to give the buyer a clear title. Refinancing can also be difficult since most lenders require liens to be cleared first, limiting your options and potentially leading to higher interest rates.
• Restrictions on property transactions: Buyers often avoid properties with liens because of the added complications with legal and financial matters.
• Risk of legal and foreclosure issues: Selling a property with liens can be a bit tricky. Liens must be disclosed to buyers, or you risk legal trouble, and the sale could fall through. Most liens must be resolved before a property can be sold, which can delay the home sale process.

Mortgage Liens FAQs

Can a Mortgage Lien Lead to Foreclosure?

Yes, a mortgage lien can lead to foreclosure, usually because you’ve failed to make your mortgage payments. A mortgage means your home is used as a way to guarantee you’ll make payments. If you stop making payments, your lender has the right to take back the home through a process called foreclosure.

This means your lender can sell your home to recover the money you still owe. Missing payments can have serious consequences, so it’s important to stay on top of your mortgage or contact your lender if you’re struggling to make payments.

What Happens If I Sell a Property With a Lien?

If your house has a lien, it’s still possible to sell it, but it can be more complicated. A lien means you owe money to someone, like the government or a company, and they place the lien to ensure you pay them back. Before moving forward with selling your home, you usually need to pay off the lien, either using your own funds or the profits from the sale.

Once the lien is repaid, the lienholder will remove it, and the buyer can purchase the house without any lien issues. Keep in mind, though, that some buyers might not want to deal with a house that has a lien. Therefore, it’s best to address it before putting your house up for sale.

How Do I Know if There Are Liens on My Property?

Liens are public records, which means it’s easy to check if there is one on your property. In most states, you can search for property liens on the website of your county recorder, clerk, or assessor’s office by entering an address. This type of search is usually free.

However, if you want a copy of the lien report, you might need to pay a small fee, which can vary.

Does a Lien Hurt Your Credit?

Although liens don’t show up on your credit report, they can still impact your credit score. This is because your lender reports your mortgage payment history to the credit bureaus (Experian™, TransUnion® and Equifax®). So, if you miss a payment or face foreclosure, your credit score may take a hit.

It’s also important to note that liens can appear in public records. If a lender finds an unpaid lien in public records, it could affect your ability to qualify for new credit.

The Bottom Line On Mortgage Liens

Remember, not all liens are bad. As long as you make your monthly mortgage payments, for example, your mortgage lien probably won’t have too much of an effect on your daily life.

However, many types of liens do put your property at risk, so it’s important to get them resolved as soon as possible. Even if the lien holders decide not to foreclose, these liens can make it impossible for you to sell your home or refinance your mortgage.

If you’re ready to become a homeowner, start an application today.