What if you moved into a house and only discovered later that your new home didn’t entirely belong to you? A lien is a legal claim that a creditor (such as a bank) holds against a property as a security interest. The lien exists to secure payment of a debt—if the borrower fails to make payments, the lender can seize or force a sale of the property to satisfy the debt.
Some liens are a common and expected part of being a homeowner. Other liens can potentially cause problems with buying or selling the property. Whether you’re already a homeowner or hoping to purchase a house, make sure you understand how a lien can impact the property and how to get a lien removed.
Lenders or creditors place a lien on a property to protect their financial interest. In most cases, this means the lien lifts when the debt is paid. Liens affect what a homeowner can do with their home, because the creditors have a legal stake in the property. Namely, if someone tries to sell their home before liens are lifted, they may not have a free and clear title, or full rights to sell the property.
Before you close on a house, a title company performs a title search to look for any issues related to the title that could affect the seller’s legal right to sell the property. According to the American Land Title Association, about 25 percent of these searches uncover issues such as liens that cloud the title and need to be resolved before proceeding with closing.
Removing a lien often comes down to paying off the debt and possibly filing a document at the county recorder’s office. In some cases, a lien might remain on a property in error. If a title search uncovers an issue like a lien, the seller and buyer need to determine who will resolve it before the sale goes through.
There are a few different kinds of liens that can have different repercussions for your property and overall financial health.
Broadly, liens fall into two categories: voluntary and involuntary liens. Sometimes, you take on a lien by choice. Your mortgage is a great example of a voluntary lien. You opt into the lien as part of your overall financing agreement with a bank or other financial institution so you can purchase a home.
In other cases, though, a creditor can put a lien on your home without your approval. If you owe a creditor or a government agency, they can file to place a lien through county or state agencies to get the balance you owe them. Here are a few common types of liens.
If you fail to pay income tax, business tax, or property taxes, expect a government agency to take action. You’ll typically be notified in writing first, but if you don’t take sufficient steps to pay the debt, the government can place a lien on your property or assets.
If a creditor takes you to court and wins, part of the judgment may allow the creditor to place a lien to secure the remaining balance you owe. The creditor may then have the right to seize or force a sale of your property if you can’t come up with a satisfactory way to pay your debt.
A mechanics lien, also known as a construction lien, is placed by a contractor to secure payments for renovations or other construction work. State laws determine when a mechanics lien expires and is no longer enforceable, but even an expired lien can cause issues down the road. If the contractor forgets to formally remove the lien, it may still show up in a title search and complicate a sale, even if there’s no remaining debt.
The main distinction separating “good” liens from “bad” liens is whether the lien is agreed upon. When a lender places a lien on your property as part of a financing agreement they make with you, this agreed upon or voluntary lien shouldn’t affect you negatively. It protects the creditor, but as long as you stay regular with payments, you probably won’t need to think about it.
An involuntary lien, where a creditor places a lien as part of an escalating effort to claim the debt you owe, is a very different matter. In this case, the creditor is taking action because you’re behind on payments. Liens are a sign that a creditor is on the road toward seizing your property (although in most cases, you still have time to get in touch and make a repayment plan before a creditor actually comes for your house).
The three major credit reporting bureaus, Experian, Equifax and TransUnion, don’t include tax, judgment or mechanic’s liens on your credit report. The lien itself may not have a direct impact on your credit score, but the prior history of nonpayment with a creditor likely will damage your score. Liens can also still have a negative impact on your creditworthiness in a lender’s eyes. Liens are a matter of public record, so a lender will likely find them in a background check and may deny you for a loan.
It’s important to keep in mind that liens cloud your title and make it hard to sell or refinance your home. Municipal governments also sometimes sell tax liens via auction as a way of getting back the money. If an investor buys a tax lien on your home, it may be possible for them to take steps to evict you and foreclose on the property.
The simplest way to remove a lien is to pay the creditor the balance you owe. Most creditors prefer to work out a payment plan rather than pursue the lengthy and expensive process of foreclosing on your house. In some cases, you may need to fill out a release-of-lien form to formally remove the lien.
Theoretically, you could try running out the statute of limitations. This varies by state — Maryland sets a 20-year statute of limitations on certain liens and California imposes a 10-year statute of limitations that is indefinitely renewable. In that time, you’re taking the risk that the creditor will attempt to make a claim on the property.
It’s also theoretically possible, though difficult, to sell the property before fully resolving the debt. Sellers may be able to negotiate to bundle the cost of resolving a lien into their closing costs. That way, homeowners can use proceeds from the sale to pay the remaining debt, and the buyer won’t have to deal with the lien. Mortgage lenders are often hesitant to work with buyers who are interested in a home with a clouded title. If a buyer does purchase a home with a clouded title, the outstanding liens become their problem to deal with, not the seller’s.
If you discovered the lien after purchasing your property, you may be able to make a claim with your title insurance company. The title insurance company’s title search is designed to reveal potential title defects that could present an issue with your ability to claim full ownership of the home. If an undiscovered lien pops up later, your title insurance company will take care of challenging the lien or resolving it so you don’t take on an unexpected burden.
Liens don’t always spell bad news for a homeowner, but it’s important to have all the information about who has a financial interest in a house. A title company can help catch liens in unexpected places, so you can clear up issues and make your next decisions about a property with confidence.
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