What would happen if you moved into a home only to learn later that it wasn’t totally yours? A lien is a formal claim that a creditor, like a bank, has as a security interest against real estate. The purpose of the lien is to guarantee the repayment of a debt; if the borrower is unable to make payments, the lender may confiscate the property or compel its sale to cover the debt.
Being a homeowner has some regular and expected liens. Other liens can make it difficult to buy or sell the property. Make sure you comprehend how liens can affect the property and how to have liens eliminated, whether you’re already a homeowner or looking to buy a home.
What Are Liens and How Do They Operate?
In order to safeguard their financial interests, creditors or lenders encumber real estate with liens. This typically indicates that after the obligation is paid, the lien is released. Due to the fact that the creditors have a legitimate claim on the property, liens limit what a homeowner can do with their house. To be more specific, if someone tries to sell their house before the liens are released, they might not have a free and clear title or all of the legal rights to do so.
A title company does a title search before you close on a home to look for any title problems that might hinder the seller’s ability to sell the property legally. About 25% of these searches turn up problems, such as liens that veil the title and need to be handled before closing, according to the American Land Title Association.
It usually takes paying off the debt and potentially submitting paperwork to the county recorder’s office to remove a lien. A lien could unintentionally linger on a property in several situations. Before the sale is finalized, the seller and the buyer must agree on who would take care of any problems that a title search turns up, such as liens.
Liens Can Be Voluntary or Involuntary
There are a few various types of liens, and each one can have a different effect on your assets and general financial situation.
Liens can be broadly divided into two groups: voluntary liens and involuntary liens. Sometimes you choose to assume a lien. A wonderful illustration of a voluntary lien is your mortgage. As part of your total financing arrangement with a bank or other financial institution to buy a house, you choose to enter the lien.
However, in some circumstances, a creditor may attach a lien against your house without your consent. If you owe money to a creditor or a government organization, they may request to put a lien through county or state organizations in order to recover the money they are owed.
Here are a few typical lien types.
A tax lien
You can anticipate a government agency taking action if you don’t pay your income tax, company tax, or property tax obligations. The government will normally first provide you written notice, but if you don’t take action to pay the obligation, it may establish a lien on your assets or property.
General judgment lien
If a creditor sues you in court and prevails, a portion of the judgment can permit the creditor to file a lien to protect the outstanding debt. If you can’t come up with a satisfactory means to settle your obligation, the creditor may then have the power to take or force the sale of your property.
Mechanics lien
A contractor files a mechanics lien, sometimes referred to as a construction lien, to ensure payment for remodeling or other construction work. State regulations specify when a mechanics’ lien expires and ceases to be valid, although even an expired lien can result in problems in the future. Even if there is no outstanding obligation, a sale may become complicated if the contractor forgets to officially remove the lien.
What Separates Good Liens from Bad Liens
If the lien is acknowledged, this is what distinguishes “good” liens from “bad” liens. This agreed-upon or voluntary lien placed on your property by a lender as part of a financing arrangement they negotiate with you shouldn’t have a negative impact on you. It safeguards the creditor, but as long as you make your payments on time, you generally won’t have to give it a second thought.
A different situation altogether is an involuntary lien, which is one that a creditor imposes as part of a continuing endeavor to collect the debt you owe. Due to your late payments, the creditor is acting in this instance. Liens are an indication that a creditor is moving closer to taking possession of your property, while you often still have time to contact them and work out a repayment schedule before they actually come for your home.
Experian, Equifax, and TransUnion, the three major credit reporting agencies, do not record tax, judgment, or mechanic’s liens on your credit report. Your credit score may not be directly impacted by the lien, but a history of unpaid debt to creditors will probably lower it. In the viewpoint of a lender, liens might nevertheless have a negative effect on your creditworthiness. Since liens are public information, a lender who runs a background check on you is likely to discover them and may refuse to give you a loan.
It’s critical to remember that liens cast a shadow over your title and make it challenging to sell or refinance your home. Municipalities may use auction sales of tax liens to recoup lost funds. If an investor purchases a tax lien on your house, they could be able to initiate action to evict you and sell the house in foreclosure.
How to Remove a Lien
Paying out your debt to the creditor in full is the quickest approach to get rid of a lien. The majority of creditors would rather negotiate a payment schedule than go through the drawn-out and expensive process of foreclosing on your home. To formally discharge the lien, you could in some circumstances need to complete a release-of-lien form.
The statue of limitations might theoretically be extended. State-by-state variations exist here; for example, California has a 10-year statute of limitations that is perpetually renewable and Maryland gives certain liens a 20-year statute of limitations. You run the danger of the creditor trying to seize the property during that period.
It is also theoretically conceivable, albeit challenging, to sell the house before paying off the loan in full. The price of removing a lien may be negotiated into the closing fees by the seller. The remaining debt can then be paid off by using the proceeds of the sale, and the buyer won’t have to deal with the lien. Mortgage lenders frequently show reluctance to cooperate with buyers who are considering a property with a disputed title. If a buyer does buy a house with a tainted title, they are now responsible for paying off the existing liens rather than the seller.
You might be eligible to file a claim with your title insurance provider if you found the lien after buying your property. The purpose of the title search performed by the title insurance provider is to identify any potential title flaws that would affect your ability to assert your full ownership of the property. Your title insurance company will take care of contesting the lien or settling it if an undiscovered lien subsequently surfaces, saving you from having to shoulder an unanticipated burden.
Although liens don’t necessarily mean bad news for a homeowner, it’s crucial to know who has a financial stake in a property. A title company can assist in finding liens in unanticipated places, enabling you to resolve concerns and confidently make future decisions regarding a property.
