When a person applies for a mortgage, the terms of the arrangement may include the creation of a mortgage lien. Because all purchasers can't pay for a house in full with cash, mortgage lenders provide buyers with an initial cash payment and allow them to repay the loan over time. The loan is secured by the property, also known as collateral. If a buyer falls behind on their mortgage payments, the lender has the right to reclaim the property. If keeping up with monthly mortgage payments becomes difficult, homeowners should contact their loan servicer or lender as soon as possible and investigate their options regarding mortgage forbearance. Also find details about what is a first lien mortgage.

Property Liens to Avoid

It is in the best interest of homeowners to steer clear of being subject to an involuntary lien, which may originate from a state or municipal agency, the federal government, or even a private contractor. One or more of the following liens might make it impossible for a homeowner to sell their property or refinance it.

Judgment Liens

As a consequence of a court judgment about child support, a car accident, or a creditor, a judgment lien may be placed on both real and personal property and future assets. This lien is considered to be an involuntary lien. If you find yourself in this unpleasant situation, to sell the property, you will need to either pay off the debt in full, negotiate a partial settlement, or get the lien lifted.

Tax Liens

Failure to pay federal income or property taxes may result in filing a tax lien, which is an involuntary lien. Generally speaking, tax liens for unpaid real estate only attach to the specific piece of property for which the taxes were due. On the other hand, an IRS lien will attach to all of your assets, including real property, stocks, and cars, as well as assets you acquire when the lien is in place. If the taxpayer does not remove the lien or pay it off, the government can take the property and sell it to pay off the debt.

HOA Liens

When a homeowner in a neighborhood served by a homeowners association falls behind on their payments for dues or fees, the HOA has the right to place a lien on their property. The lien may cover the amount and any late fees or interest.

The homeowner's association will submit the lien to the county in most circumstances. Likely, selling the house will not be feasible if a lien is related to the property's title. In some circumstances, if the lien has not been satisfied, the HOA has the legal right to foreclose on the property, sell it, and use the profits from the sale to pay off the debt.

Mechanic's Liens

A contractor has the right to file a lien on a homeowner's property if the homeowner fails to pay for work or supplies provided by the contractor. A mechanic's lien may be filed against everyone who has worked on the project, including builders, suppliers, and subcontractors. It isn't easy to sell a property without settling a lien placed on it by a mechanic or another professional. Liens are recorded on a property's title when they are filed.

Lien Priority

When there are numerous different forms of liens, the order in which they are resolved is referred to as the "lien priority." In most cases, the priority of liens is determined by the chronological order of the lienholders, with the first lienholder having precedence. When a property is sold for cash or goes through the foreclosure process, lien priority often becomes relevant. The priority determines which parties get paid from the proceeds of the sale of the residence first.

How Can Liens Affect Your Mortgage?

The ability of homeowners to acquire a new house, sell their current property, or refinance their mortgage may be hampered if the lien was placed against them involuntarily. If the homeowner already has many liens on their property, the lender may consider refinancing to be too much of a risk for them to take on.

Or, when homeowners decide to sell their lien, they will be required to have sufficient funds available at the time of closing to pay off any voluntary mortgage liens or other liens that may exist on the property. If they sell the home for less than what they paid for it or if they have other liens on the property that takes precedence, it may not be easy to find a buyer prepared to pay the difference between the two prices. A person's ability to get a mortgage may be severely limited for at least three to seven years if a lien on their property results in foreclosure.