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 mortgage 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.
How liens work
A lien can be voluntary or involuntary. Here’s how the two differ:
- Voluntary lien: This is a lien you agree to. When you buy a home or refinance, you agree — somewhere in all that mortgage paperwork, you sign at closing — to allow the lender to place a lien on your property. The lien ensures that if you sell your home, the lender will get repaid.
- Involuntary lien: This is a lien you don’t agree to. Homeowners associations, tax authorities, contractors, or other creditors may place liens on your home if you don’t pay them what you owe.
Tip:
The fine print in your agreement with your HOA or contractor will likely notify you about the possibility of a lien. Be sure you understand what you’re agreeing to before signing any contract.
Check Out: A Complete Checklist of Mortgage Refinancing Requirements
Types of liens
Not all liens are bad: The first lien on a property is the mortgage. Without that lien, you wouldn’t be able to borrow that huge sum of money for your home purchase. Some liens, however, may come as a result of legal action.
Mortgage liens
A mortgage lien is not harmful as long as you make regular payments on your home loan. When you pay off your mortgage, the lien goes away.
If you fall way behind and can’t refinance or work out a catch-up plan with your lender, you will end up in foreclosure. At that point, the mortgage lien allows the lender to sell your home and keep enough of the proceeds to cover what you owe.
Homeowners association liens
If you pay your homeowners association dues and special assessments on time, you don’t need to worry about homeowners association liens.
If you don’t pay them, however, the homeowners association can place an automatic lien on your property. And if you don’t catch up on what you owe, the HOA has the right to foreclose.
Tax liens
A tax lien can be placed on your property if you fail to pay property taxes or income taxes. As with mortgage liens and HOA liens, if you don’t make good on what you owe, the lien holder can foreclose on your home. They may then auction off the property to repay your debt.
For example:
The IRS holds regular auctions of real and personal property it has seized to repay delinquent federal tax debts. Local tax assessors use a similar process to deal with unpaid property taxes.
Mechanic’s liens
A mechanic’s lien isn’t exactly what it sounds like: It has nothing to do with automobiles. Instead, it has to do with contractors you hire to make repairs or improvements to your home. That’s why it’s also called a construction lien or materialman’s lien.
If you don’t pay the HVAC mechanic who repaired your air conditioner, they can attach a lien to your home. The same is true if you don’t pay a roofer, a carpenter, or anyone else who works on your property.
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.
However, if you continue to refuse to pay and collection attempts don’t work, you could end up with a judgment lien.
Solar liens
If you finance solar panels for your house, the solar company may put a solar lien on your property until you’ve paid for the panels.
Learn More: What Is a Mortgage?
How to remove a lien on a property
Paying off the debt is the most common way to remove a lien, 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.
Tip:
If you have already paid what you owe, request a release or satisfaction of lien from the lienholder and ask them to record the satisfaction of lien with the county. If the lien isn’t legitimate, you may be able to get it removed in court.
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
Yes, you can still sell a property without clearing unpaid liens, but you’ll need home equity.
If the proceeds from selling your home will be high enough to repay your debts, then a sale can get rid of the lien and clear up the title. 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.
Frequently asked questions
Does a lien ruin your credit?
A lien itself doesn’t directly impact your credit score. However, if the lien is a result of unpaid debts, like tax liens or mechanic’s liens, it can indicate financial trouble, which could indirectly affect your creditworthiness. While newer credit scoring models do not factor in tax liens, older models may still consider them, potentially lowering your score.
Is a lien the same as a loan?
No, a lien is not the same as a loan. A loan involves borrowing money from a lender, while a lien is a legal claim or right against a property due to an unpaid debt. For example, if you take out a mortgage (loan), the lender places a lien on your property until the debt is fully repaid.
What are the effects of a lien?
The primary effect of a lien is that it gives the lienholder the right to seize or sell the property if the debt isn’t paid. A lien can prevent you from selling or refinancing the property until the debt is settled. Additionally, having a lien may make it harder to obtain new loans or credit.
How to remove lien amount?
To remove a lien, you must pay off the underlying debt. Once the debt is satisfied, you can request a lien release from the creditor or lienholder. If the lien is incorrect, you may need to dispute it through legal action. After the lien is cleared, the creditor will typically notify the relevant parties, such as the county recorder’s office, to update property records.
What are lien charges?
Lien charges refer to the costs associated with placing or removing a lien on a property. These charges can include filing fees, interest on unpaid debt, and any legal fees incurred during the process. The specifics of these charges depend on the type of lien and local regulations.
Is a lien the same as ownership?
No, a lien is not the same as ownership. A lien gives a creditor or entity the right to claim or sell the property if the debt is unpaid, but it does not transfer ownership of the property. The property owner still retains ownership, but their ability to sell or refinance the property may be restricted until the lien is resolved.
