What Is a Lien and How Does It Work?

Liens might have a bad reputation, but not all of them need to be avoided. Specifically, any mortgage lien placed by your lender when you buy a home, refinance, or get a home equity loan is a normal part of the borrowing process and not something to fear. A lien only becomes a problem if you fall too far behind on your debt payments.

What is a lien?

A lien is a claim on your property related to an unpaid debt. It gives the creditor a way to collect what they’re owed if you don’t make payments.

If you want to refinance your home or get a second mortgage, you’ll need to have a clear title. The same applies if you want to sell your home; the new homeowner will want to be able to own the home without anyone claiming their ownership rights.

What are the different types of liens?

Liens generally fall into two categories: voluntary or involuntary. "The voluntary lien is agreed to; you approved it," says Hillery Dorner, a real estate attorney based in Concord, Massachusetts. An involuntary lien is something you did not approve but was put there by court order, or by a tax authority or a tradesperson." In other words, you might face an involuntary lien after failing to repay a debt.

Here's a breakdown of the different types of voluntary and involuntary liens you may encounter when owning a home:

Mortgage liens

If you take out a mortgage to buy a home or refinance, the lender places a voluntary mortgage lien on your property. The lien acts as the lender's legal claim. It grants the lender the right to take possession of the property and sell it if you default on the mortgage. 

"A mortgage is fairly inconsequential on a daily basis, so long as you are making your payments," Dorner says. "But when you sell, the lien holder gets paid first, and you get the balance of the value, or the equity."

Homeowners association liens

When you buy a home in a community with a condo association or a homeowners association (HOA), you may be required to pay dues and special assessments. These are usually outlined in the association's covenants, conditions, and restrictions (CC&Rs) document. The association can place an involuntary lien on your unit if you fail to pay these fees on time. And if you don’t catch up on what you owe, the association has the right to foreclose. 

Tax liens

In the U.S., people are generally required to pay taxes on a regular basis. Failing to pay a federal tax debt can eventually result in a tax lien, which is the government’s legal claim against your property. The same goes for your local government, which can levy a tax lien when you don't pay property taxes.

As with mortgage liens and HOA liens, the lien holder may be able to foreclose on your home and auction off the property to repay your debt. Federal liens fall off within 30 days after paying off the tax debt in full, while other tax liens depend on the taxing authority. 

Mechanic’s liens

A mechanic’s lien, also called a construction lien or materialman’s lien, has to do with contractors you hire to make repairs or improvements to your home. A mechanic can place an involuntary lien on your home if you fail to pay them in a timely manner.

Subcontractors and suppliers can also file a mechanic’s lien, so it’s important to work with reputable contractors who pay their subs and suppliers.

Judgment liens

Also called a judicial lien, a judgment lien can attach to your property when you lose a lawsuit and you owe the other party money. When a creditor, such as a credit card company or debt collector, wins a judgment against you for unpaid debt, they will not automatically be awarded a lien against your home in most states.

In some cases, "it's possible that the court will order the sale of the property so that the creditor can get paid back," Dorner says.

How does a lien affect property ownership?

It depends on the type of lien. A voluntary lien, such as a mortgage lien, won't affect your property ownership as long as you make your home loan payments on time. If you're looking to sell or refinance your property, you'll need to satisfy the lien first. This happens when you close on the property sale.

But keep in mind: If you're trying to sell a home with an involuntary lien attached, it could reduce the marketability of the property. Potential buyers may be wary of purchasing a property with unresolved liens because of the perceived financial risk.

With involuntary liens, the lien holder may be able to initiate foreclosure if you can't resolve the lien. You'll lose your property as a result.

How can you remove a lien from your property?

You have a few options if there's a lien on your property. "The simplest way to remove a lien is to pay the debt," Dorner says. But other courses of action, such as settling with the lienholder, may be possible too.

Pay off the debt

If the lien is legitimate and you have the money, repaying your debt is the obvious solution. For example, if you didn’t finish paying the contractor who remodeled your kitchen, or you fell months behind on your HOA dues, you just need to make good on your commitments.

Settle with the lienholder

If you have a judgment lien against your home for something like unpaid credit card debt, you might be able to negotiate a settlement with the lienholder.

In other words, you might be able to settle the debt for less than 100% of what you owe, especially if you have little to no home equity.

Another possibility may be to negotiate a payment plan to pay off the lien. Make sure to get any agreement in writing.

Sell the property

It's still possible to sell a property without clearing unpaid liens, but you’ll need home equity. When you sell, "the lien holders are paid first and you are paid last," Dorner says. But, "if the lien is for more than the value of the property, you will need to negotiate with the lien holder to see if they will release (it) for less than full value." This is called a short sale.

The obvious drawback of selling your property to pay off a lien is that you’ll have to find another place to live.

Run out the statute of limitations

If you hold out on paying a lien for long enough, will it just go away? This is what people are hoping for when they talk about running out the statute of limitations, but it’s much more likely to land you in further hot water.

Statutes of limitations on real estate liens vary from state to state. They also depend on the type of lien. For example:

• You can’t run out a property tax lien, HOA lien, or mortgage lien. Tax collectors, HOAs, and lenders can all foreclose on your property if you don’t pay them.
• The statute of limitations for a federal tax lien is generally 10 years. However, it can be extended if you enter an installment agreement with the IRS or get them to release a levy on your assets. Furthermore, the IRS can levy, seize, and sell your assets if you refuse to pay your taxes.
• For a mechanic’s lien or judgment lien, the law varies by state. In Georgia, for example, the statute of limitations on a judgment lien is seven years. The creditor can then renew the lien for another seven years.