A lien is an unpaid debt attached to a property that complicates the sale of the property until it’s resolved. While mortgage liens are voluntary and expected, other types of liens can keep you from having clean title to your property. Mechanics lien, tax lien, and a judgment lien are involuntary and must be resolved before sale.
Types of Liens and How They Work
There are four primary types of voluntary and involuntary liens seen frequently in real estate: mortgage liens, mechanics liens, tax liens, and judgment liens. This section will describe each of these liens, whether they are voluntary or involuntary, and how they work.
There are four common types of liens on a house or property.
1. Mortgage Liens
A mortgage lien is a legal form of security to guarantee payment of a debt using property as collateral. A lien or, in some states, a deed of trust, protects the lender and gives them rights to your property if you don’t pay as promised. Liens are released when the loan is paid in full.
Some other important information to know about mortgage liens includes:
- You pay, you stay: As long as you pay as promised a lender will not exercise their right to take ownership of your property
- They take priority: Mortgage liens typically take priority over other lien types we will discuss, except tax liens
- They are common: It is common in America for people to assume significant debt when purchasing a home, a lien allows potential homeowners a way to finance the purchase
- Paid at the sale of property: When you sell your property, liens are required to be paid to transfer the deed to a new owner
- They are voluntary liens: When you agree to borrow funds from a mortgage lender you voluntarily agree to use your home as collateral in case of nonpayment
- There are consumer benefits to this type of lien: A mortgage lien allows you to borrow a large sum of money. In a purchase, a lien allows you to buy a house before you save enough cash
Foreclosures occur when a borrower doesn’t pay as promised and the lender exercises their right to take the property. A mortgage lien gives lenders the right to foreclose but this is expensive and a last resort solution. Lenders will charge late fees for missed payments and send written warnings to encourage payment prior to foreclosure.
2. Mechanics Lien
When a contractor enters an agreement with the homeowner to perform services and improve a property, the homeowner agrees to pay for these services and the work is initiated and/or completed. Mechanical liens are the most common form of an involuntary lien placed on real estate properties.
Technically, a mechanic lien can be placed on a property for any dollar amount. However, there are costs associated with filing a lien, so they are more common with larger losses. Each state has its own policies for liens are handled. In all cases, they must be removed or satisfied before a deed transfer.
For example, an HVAC contractor installs a new air handler for your fix-n-flip property, once complete, they attempt to collect the remaining balance owed, and you decide not to pay. They, in turn, can file a lien against your property for the amount owed requiring their debt be paid prior to any deed transfers.
Filing a successful mechanic’s lien indicates that:
- A specific process was followed: Mechanic lien law varies by state, so let’s say the contractor has followed the legal process required by your state to file the lien
- There will be a cloud on the title: If the lien is affirmed, the contractor now has a cloud on title
- Debt is attached to the property until resolution: A mechanic’s lien indicates unpaid contractor debt is attached to it that transfers with the property; it’s very unlikely that anyone will want to buy property with a lien attached because they won’t hold clear title
The best way to prevent a lien is to pay as agreed. If you’re working with several subcontractors, hiring a general contractor may be a good idea. Make sure to keep records of draws and payments in case needed in court. Keep in mind that each state has its own mechanic lien laws and waivers.
3. Tax Liens
If a homeowner does not pay their federal, state, or local taxes, a tax lien can be placed against their property. Tax liens are placed on a property for specific property tax neglect, but can also be placed for things like unpaid income taxes.
While a tax lien doesn’t mean immediate seizure of property, this involuntary lien takes priority over other liens and will remain in place until the debt is paid off. This type of lien usually has a process which, without payment, will escalate until the property is sold to satisfy the debt owed.
The process of having a tax lien is well documented and includes:
- Prior notice to homeowners: Before a tax lien is filed, a homeowner will be sent a tax bill demanding payment and notified of consequences of not paying the amount
- Notice to other creditors: If the homeowner does not pay the bill by the time period given, a lien is then filed that will make other creditors, such as mortgage companies, aware that the government has claimed to this particular home
- Credit impact: A tax lien notice is sent to your mortgage lender and credit reporting agencies making future loans difficult and could force a mortgage lender to foreclose
- Must be paid at the time of sale: Tax liens must be paid before you can sell your property; a title company or real estate attorney can help with this
If there is no resolution between the homeowner and local or federal tax agency, the home will be placed for sale by the taxing entity called a “tax sale.” At that time, the property, the name of the homeowner, and the taxes due are often published in local jurisdictions where the process of sale can proceed.
4. Judgment Liens
A judgment lien can be placed on a property when a homeowner is sued, loses, and cannot pay. Judgment liens cover an array of circumstances including child support and auto accident lawsuits. A judgment lien can be filed against real estate or personal property like vehicles or furniture to satisfy the debt.
Usually, judgment liens are a last resort for attempting to capture the financial debt. For example, in child support, you are often given the opportunity to atone for your delinquency. However, if you owe money, do not pay it, and the court rules in favor of the person owed, they then can file a judgment lien to recoup this money.
Judgment liens can also bring these problems:
- Wage garnishment: Wages are often garnished for debt payment prior to judgment liens since judgments do not hold first lien position like taxes or mortgages
- Sale complications: Clear title transfer to a new seller cannot occur until the lien is satisfied
- They follow you: Even if the person does not own property currently, judgments can follow them to future assets
For example, if Peter is refusing to pay child support and has a judgment for $40,000 yet does not have any assets, a judgment lien will be attached to his mortgage and property at the time of purchase if he attempts to purchase a home in the future.
Implications of a Lien on a Property Sale
The sale of your home can’t close until any lien on the property is resolved. The lien puts a cloud on title that can cause two primary issues: ongoing delays or cancellation of the transaction altogether. While mortgage liens are known and understood, other types of liens can cause monumental setbacks.
There are two primary implications of a lien on the sale of your property.
1. Delayed Settlement
Delayed settlements are common in properties with title liens and sometimes can be resolved with relative ease. For example, if sellers are in the position to resolve the lien and will pay it to rid themselves of the property, or have administrative issues that placed a lien that clouded the title unnecessarily.
There are times when a lender hasn’t released a lien on a paid-up loan. In this administrative case, a title company or real estate attorney can help, but it takes time. If you aren’t using a title company or real estate attorney, then expect significant delays, especially if your lender has gone out of business.
2. Canceled Transaction
While some liens are simple to resolve for the property owner, others may be complex or mired in legal problems that drag the process on with no end in sight. There are a number of reasons that purchases may fall through if the property has a lien attached to the property.
Reasons a purchase transaction could be delayed or canceled:
- Mislead buyers: Property owners mislead buyers in regards to closing time frame to deliver a clear and marketable title and buyers can’t wait
- Formal disputes: Owners want to dispute the lien legally in court and buyer cannot wait for court dates and processes
- Last-minute title search: Cash buyers, investors or folks not working with agents may not request a title search until the last minute, and a lien is discovered requiring delays
While some types of liens are paid off at the time of closing, such as mortgage liens or even a small contractor lien that is negotiated in advance, most banks and other lenders do not want to finance a property with an existing lien that will not be paid by the time the new owner takes possession.
It is important to note that some investors will buy properties cash with specific kinds of liens, like tax liens, if they can discount the price in their favor, but these are not the primary purchasers on common residential properties.
How to Resolve Liens
While some liens are from administrative errors, the majority need to be paid in full or legally disputed and resolved to have the lien released. To proceed with the sales process in a timely fashion, you can pay the full amount, set up a payment plan, appeal the lien, or negotiate in a sales price.
There are four ways to resolve liens.
1. Pay the Amount in Full
The best approach to resolving an accurate, existing lien is to pay the amount in full when possible. Even the straightforward approach of paying liens outright will often still require time and tenacity. For example, when paying IRS tax liens, the agency has a 30-day period to release the lien that will still often create delays.
Be aware that because the lien is released from the property does not mean that it will be removed from your credit history. Be sure that if you pay your lien that you ask the party paid to issue a release form that you can dispute the credit bureaus that continue to have it on record.
2. Set Up an Installment Plan or Request a Partial Release
Some liens, such as judgment liens or tax liens, will allow you to set up an installment plan, called an “installment agreement” for tax liens. Other liens like a mechanic’s lien may allow you to make a partial payment and then change the amount of the existing lien on record — called a partial release — which may make it more amenable to buyers.
If the IRS or other state or local tax agency feels you can make payments to your existing debt, they can place you on an installment agreement, and you can then request withdrawal of the lien. This lien is still not removed automatically from your credit history, so be sure to address this with credit bureaus after your repayment agreement is in place.
A mechanic’s lien may not technically allow for partial payment, but if one is made and there is a record of it, you may then petition to change the existing amount of the lien on record. This is called filing a “partial release.” This does not resolve the lien, but if there are cash buyers willing to negotiate on price, a smaller amount on record makes the home more likely to sell or more likely to be able to clear the lien upon sale if there are any profits to the homeowner.
3. Appeal or Dispute the Lien
While you are given an opportunity to dispute all liens prior to their installment in a court of law, sometimes there are liens filed in error, such as happens periodically with federal tax liens. If this happens to you, you can appeal it through an administrative hearing. A real estate attorney can help you through this process.
In the case of lien errors, it will typically be dismissed within 14 days of the judgment in your favor. Be aware that even though these liens are no longer present, they are often still noted across credit bureaus, so it is wise to check them even after dismissal to have them removed from any reporting agency records.
4. Negotiate with a Homebuyer on Price to Include Lien Considerations
While unconventional, there are investors and homebuyers who bring cash offers and are willing to negotiate with lien considerations in mind to get a solid deal. Some buyers are willing to negotiate by subtracting amount owed from the purchase price. Doing this is an uncommon strategy, but one that has the potential to benefit both the homeowner and purchaser.
As a method of investment, some individuals will buy tax lien certificates that have been issued to homeowners. To learn more about this practice see our guide to tax lien and tax deed investing.
What is a Lien Frequently Asked Questions (FAQs)
While we’ve answered a lot of questions about liens, you may still have some unanswered questions. We’ve provided responses to some of the most frequently asked questions here. If you have other questions, feel free to pose them in the FitSmallBusiness forum, and we’ll get back to you with an answer.
How Do You Know if there is a Lien on Your Property?
A lien will not usually be placed on your property without notification. However, to be sure there are no involuntary liens existing on your property, go to your county assessor’s office online and do an address lookup that will give you this information at no cost or a title company or a real estate attorney can help for a reasonably small fee.
How Long Do Liens Last?
Expiration dates on liens depend on the type of lien and state laws. Federal income tax liens last longer than some states mechanic’s liens which can range from 90 days to more than 10 years with most laws allowing the creditor to renew the lien prior to the expiration.
Can You Sell Your House with a Lien Against it?
You can sell the property, but it’s very difficult. Lenders typically won’t issue loans for properties with existing liens. This because a lien indicates that another creditor has a financial claim against a property. Resolving the liens prior to listing a home for sale is the best solution.
The Bottom Line
Examining what is a lien, we find not only numerous types of liens, but the consequences they can have when approaching the sale of a house or property. While there are various ways in which liens can be approached for resolution, paying the lien in full or arranging a payment plan is usually the most effective option to clearing the title and allowing the sale of the property to proceed within an expected timeframe.