Good Debt, Bad Debt…
Nowadays, people can be divided into three classes: the haves, the have-nots, and the have-not-paid-for-what-they-haves.– Earl Wilson
If you own a home, there’s probably a lien (or a few) on its title. A lien represents a debt that the homeowner has yet to pay. A mortgage creates a lien. There can be other ways, too, that “lienable” debt finds its way to a house title.
Here, we review the facts: what a lien is, the common types of liens, and the effects liens can have on your property.
A Lien Represents Secured Debt.
If someone lends you money, your debt could be secured or unsecured. Secured debt is debt that attaches to a specific asset that belongs to you. Secured debt gives the lender an interest in that asset, to lower the risk of making the loan.
When people talk about liens on homes or condos, they refer to a secured debt that a creditor (like a bank, a construction company, or the tax office) holds against the home’s title. A recorded lien on a home can be found in a public search.
One day, the home will be conveyed to a future owner. Liens on the property have to be resolved by then, to enable that future owner to receive the title to a home free and clear. This is why a title search is run when a title is being conveyed from one owner to the next.
In the case of a home sale, where a title search does unearth liens, the homeowner and the hopeful buyer need to agree on how to resolve the debts to clear the title. One of the parties must resolve the debt; otherwise, the buyer will have trouble getting a final mortgage approval. Lenders, of course, prefer not to issue mortgages for homes with debts already clouding their titles.
A Mortgage Is a Voluntary Lien.
For home loan borrowers, mortgages (see also: deeds of trust) and home equity loans are “good liens.” Faithfully paying off a home loan should reflect well on a homeowner’s credit score. If the homeowner regularly pays back the loan, no worries.
Mortgage liens are in place to shield the lender from the risk of default, though. If the homeowner defaults on a mortgage, the lien holder has rights in the property. If a homeowner cannot work out a payment plan and fund it enough to avert foreclosure, the lender can take the home and auction it off. Fortunately for many distressed borrowers, lenders have to make an effort to work with borrowers before it gets to that stage.
☛ Title XIV of the Dodd-Frank Wall Street Reform and Consumer Protection Act amended the federal Truth in Lending Act to promote mortgage modifications and help borrowers avoid default situations. Learn more about Dodd-Frank’s effects on mortgages here.
Ultimately, the homeowner must finish paying off the mortgage, so that the lien may be removed from the county records and an unclouded title can be conveyed to the next owner of the home. Sellers can use their home equity to pay off outstanding balances and cover their share of closing costs. This is a normal step in the process of selling and buying a home.
Mechanics’ Liens Represent Debts to Contractors.
Mechanics’ liens represent money owed to cover construction or renovation work. Also called construction liens, they are recorded by contractors. These liens are not valid indefinitely (check the state’s statute of limitations). But they may be renewable under state law.
Typically, the homeowner must receive a timely preliminary notice and a Claim of Mechanics’ Lien letter from the supplier or construction firm that did not get paid. When paying the company, the homeowner should ask not only for a receipt, but also for a copy of the lien release.
Contractors or suppliers must perfect their interest in an unresolved lien by demanding repayment within a specific time frame. If they fail to bring a timely action, the homeowner can ask the court to release the lien.
The bottom line on mechanics’ liens? It’s important to know these liens can turn up. And it’s important to remove liens — whether valid, paid-off, or expired — from the county records.
Unpaid Taxes Can Turn Into Liens.
Overdue taxes can turn into liens. First, the taxpayer can expect written notification about the government’s plan to recover what’s owed, and a demand for payment. Generally, the best way to resolve tax debts is by calling the number on the letter within ten days and work with the tax office to set up an installment plan. For federal tax debts, a discounted plan (offer in compromise) may be accessible for those with hardships.
The IRS files its Notice of Federal Tax Lien on a title when overdue taxes are neglected. This document can be found through a title search. Eventually, when the home is foreclosed, refinanced, or sold, the government claims its debt.
States, cities and townships can create tax liens. Some sell the right to be paid — to investors who can, in turn, collect interest and even begin foreclosure and eviction proceedings if they believe it will be worth the trouble to do it.
Sometimes, tax liens are found on inherited homes. How do heirs respond? Some heirs pay them off or take out loans to pay them. Others might simply refuse to accept the title of a home overburdened by debt. In the latter case, the estate could be declared insolvent. There may be still other options. A consultation with a real estate or estate planning lawyer is the effective way to know the best route ahead in a particular state, and in a specific heir’s situation.
☛ Are you receiving a gift of a house, or inheriting property? Spot the issues before accepting a deed; and remember: you can turn it down. State-specific Disclaimer of Interest forms on Deeds.com can be easily downloaded and completed.
Judgment Liens Stem From Court Actions.
If somebody wins a monetary award from you in court, a judicial lien can be recorded to compel you to pay up. How long these liens stay in place, whether they are renewable, and how they can be enforced is all up to state law. Here, for example, is California’s judgement lien statute.
Judgment liens could arise from child support obligations, money owed to companies or lenders, or court-ordered damages.
Sometimes, judgment creditors record liens against the wrong person’s property. Where a lien is questionable, a title company can research the case, identify the creditor, and have the lien released before a transaction closes. A real estate lawyer should also be able to get such issues rectified.
Condo Liens Are Nothing to Sneeze At.
Unpaid homeowners’ association (HOA) dues, assessments, and fines can also create liens. Speaking of HOAs, some states allow condo properties to create super-priority liens that take a front seat to other liens — even mortgages! Yes, some states have granted HOAs the ability to foreclose on and sell units, erasing mortgage lenders’ secured interests, if the owners are delinquent long enough. Which governments have done this? Alabama, Alaska, Colorado, Connecticut, Delaware, D.C., Florida, Hawaii, Illinois, Maryland, Massachusetts, Minnesota, Missouri, Nevada, New Hampshire, New Jersey, Oregon, Pennsylvania, Rhode Island, Tennessee (as clarified here), Vermont Washington, and West Virginia, plus Puerto Rico.
When states create laws like this, their reasoning involves a public interest in neighborhood safety and upkeep. But critics argue that these laws cause a problem for mortgage lenders and can increase the cost of mortgages.
The main thing to know? Condo charges can’t be neglected, or they’ll create more trouble for the owner in the long run.
Some Liens Go Unattended in the County Records.
Sometimes they lurk…until the owner is ready to convey the house to a new owner. At this point the question is how to transfer the clouded title.
If the owner is selling, then the lien could be paid from the proceeds. If the owner has built up enough home equity, the parties’ agents can create a legal agreement on the part of the seller to make a final debt payoff before the title is conveyed, and have the creditor remove it from the county records. Then, the buyer gets a clear title. Some creditors will agree to have an old debt settled at a discount.
Pro tip: A buyer of a foreclosed home should have the title history examined for “senior” liens that remain on the house through the foreclosure process. There may even be still-unrecorded liens. A title company can explain to the buyer how to best avert or address any future claims against the title.
And If All Else Fails…
Sometimes an owner or buyer might have no option but to approach a court with a quiet title action and attempt to have the lien removed, possibly through a debt settlement. So, negotiate! You might have to negotiate anyway after filing an expensive legal action. Many creditors would opt to offer a discount or an installment plan rather than deal with a court action.
Know your liens, and keep your home’s title free and clear. Most any lien can be resolved, but some are harder to budge than others. Consult with a lawyer for guidance where appropriate.
Deeds.com: How a Lien Affects the Real Estate Title (Aug. 28, 2019).
Davis Vaughn, Lien Back: Why Homeowner Association Super-Priority Lien Statutes Should Be Repealed (via SSRN; 2017).
Audrey Barker for Spruce.co Blog: What Are Liens and How Can They Impact Your Property? (Mar. 10, 2021).