Many people have liens on their real estate. Consider your mortgage—a lien that leverages the home as collateral for your mortgage loan. Other liens, too, can show up in a title search. Homeowners should know what kind of liens might attach to a home they already own, or a home they’d like to buy. Here, we review the basics of home liens: types of liens, how they impact the home’s title, how they can lead to foreclosure, and how to remove them.
Types of Home Liens and Their Impact on a Title
A home lien represents an unpaid debt. Recorded liens, including mortgages, appear in a title search until the debtor completes the final payoff. They must be resolved for a new buyer to receive an unencumbered title.
States regulate voluntary liens (example: your mortgage) and involuntary liens (example: tax liens) in terms of their priority. The order of lien priority determines which creditors can get access to their share of the collateral’s proceeds first. Thus, the higher they rank in priority, the more likely certain lien creditors are to insist that a home is sold to pay debts.
A mortgage lien or deed of trust is a common lien on the property title. The seller must pay off the mortgage so that clear title may be conveyed to the buyer.
The Internal Revenue Service may place a tax lien against all of a person’s property—including the home—once it sends the debtor a demand letter for overdue taxes and more than 10 days pass without payment. Look for a document in the county records called the Notice of Federal Tax Lien, and check the date. It has priority over every subsequent lien.
The IRS has a right to repossess a home, but rarely does. Anything but a high-value home with a sure buyer lined up can leave little satisfaction for the government once the mortgage gets resolved. In the more common scenario, the owner sells, refinances, or faces foreclosure, and the government receives the payment for its tax lien at closing.
Other liens to look for are mechanic’s liens, which represent money the owner owes a contractor for carrying out improvements on the home.
Liens for unpaid bills for local services, or state and local taxes, may also cloud the title. Resolution is necessary before the owner transfers title through a home sale. Assuming the owner has sufficient home equity, the parties can draft an agreement that the owner will resolve the lien from the home sale proceeds, completing the debt payoff before a title transfer.
Common examples of judgment liens are court-awarded child support debts or damages owed to plaintiffs in an accident lawsuits. When a court awards a monetary judgment to a plaintiff, the plaintiff becomes a judgment creditor, who records the lien against the title. As with a mechanic’s lien, a judgment lien clouds the title. The owner must resolve the debt to convey the title to a buyer.
Other Mortgages and Debts
Second or third mortgages and home equity debts may attach to the property. Lenders that have extended secured financing, and filed UCC-1 Financing Statements with the secretary of state, can create liens against home equity. Liens can also involve unpaid homeowners’ association dues, which the association may help to resolve in order to bring a new buyer in.
The order in which multiple liens were recorded generally establishes seniority. Again, check state law’s impact on payment priority.
A Buyers’ Due Diligence
Buying? Consider scouring the title report for unresolved liens. Most buyers don’t go to the county recorder’s office to review the title history, but—especially when buying a home at a foreclosure auction—they should pay for title searches.
If a title report shows a lien, the title or escrow company checks for the recording date, creditor, and debt amount, so the lien creditor can be identified, and the lien resolved, before closing.
If the sale involves a foreclosure home without a general warranty deed, a buyer might lack notice of yet-unrecorded UCC filings and mechanic’s liens. Title insurance anticipates the possibility of future claims against the title. The title company can explain to the buyer what steps to take to obtain a general warranty deed.
When a Lien Leads to a Foreclosure, What Happens?
When a mortgage debtor cannot pay enough to avert foreclosure, home is sold at auction.
The purchase of the home extinguishes the trust deed. Yet some unsatisfied lien holders, or those that received no notice of the sale, may still have rights.
The buyer should have the title history examined for liens senior to the one being foreclosed on, as these survive foreclosure. Tax liens, judgment liens, UCC liens, and even other mortgages might have survived the foreclosure.
The buyer’s eyes must be wide open for any outstanding agreements—either to obtain assurance that they will not become the buyer’s responsibility, or to prepare for resolving the liens (see below). The buyer should also anticipate leases, easements, and other agreements that could survive the foreclosure sale.
How to Remove a Lien
Property title liens can be paid out of the home sale or foreclosure sale proceeds. If there is no such agreement, the buyer has several options:
- Pay the debt, and ask the creditor to file for removal of the claim against the title.
- Negotiate with the creditor to settle the debt at a discount if possible.
- Bring a quiet title action to try to prevail over the creditors’ lingering rights and remove a lien from the title.
To resolve a tax dispute that may impact your home’s title, request an informal Collection Due Process hearing by the deadline in the federal lien notice. This can provide an opportunity to resolve tax debts through installment payment plans, or receive a discount on the debt, called an offer-in-compromise, from the IRS.
For case-specific advice and assistance, as always, consult with your accountant or a tax attorney.