Can You Refinance With a Lien on Your Home?

Refinancing a home can offer significant financial advantages, such as securing a lower interest rate or converting equity into cash. However, homeowners often encounter complexities when a lien is present on their property. While a lien can complicate the refinancing process, it does not always make it impossible. Understanding these legal claims and the steps available to address them is important for successfully navigating a home refinance.

What a Lien Means for Your Home

A lien represents a legal claim placed on a property, serving as security for a debt or obligation. This claim allows a creditor to seize and sell the property if the homeowner defaults on the debt. Liens are recorded documents that attach to the property’s title, affecting its marketability and transferability until resolved.

Mortgage liens are voluntary, arising when a homeowner uses their property as collateral for a loan, such as an initial purchase mortgage or a home equity line of credit. The lender places this lien to secure their interest until the loan is fully repaid. Involuntary liens are placed on a property without the owner’s consent, due to unpaid debts. Property tax liens occur when a homeowner fails to pay local property taxes, giving the government a claim. A federal tax lien can be imposed by the Internal Revenue Service for unpaid federal income taxes.

Judgment liens arise from court rulings where a creditor wins a lawsuit against a debtor and records the judgment against the property. This gives the judgment creditor the right to collect the debt from the property’s proceeds. Mechanic’s liens, also known as construction liens, are filed by contractors or suppliers who have not received payment for labor or materials used to improve the property. Homeowners Association (HOA) liens can be placed on a property when a homeowner becomes delinquent on dues, fees, or assessments. If unpaid, an HOA may have the authority to foreclose to recover the debt.

How Liens Affect Refinancing

Existing liens directly impact a homeowner’s ability to refinance because they represent a financial risk to a new mortgage lender. Lenders are concerned with lien priority, which determines the order in which creditors get paid if a property is sold, especially in a foreclosure scenario. The principle of “first in time, first in right” applies, meaning the lien recorded first holds a higher priority. The primary mortgage lender seeks to hold the first lien position to ensure their loan is repaid before other claims.

When a homeowner seeks to refinance, the new lender wants their mortgage to be in the first lien position. If other liens are already attached, they could take precedence over the new mortgage, diminishing the new lender’s security. Most lenders will require existing liens are either fully satisfied and released, or formally subordinated, before they approve a new refinance loan. Involuntary liens can make refinancing more complicated, as they often signal financial distress and pose a greater risk to the lender.

Addressing Liens for Refinancing

Managing existing liens is a necessary step for homeowners seeking to refinance their property. The most direct approach is to fully pay off the outstanding debt associated with the lien. This payment can come from personal funds, or in some cases, the new refinance loan proceeds if the lender permits. Once the debt is satisfied, the lienholder will provide a formal lien release document. This document confirms the debt has been paid and the claim on the property is removed. The homeowner must then ensure this release is recorded with the local county recorder’s office to update public records and clear the property’s title.

For certain voluntary liens, like a second mortgage or a home equity line of credit (HELOC), lien subordination may be an option. Subordination is an agreement where an existing junior lienholder agrees to allow a new mortgage to take a higher priority position, effectively moving their claim to a lower priority. This involves the junior lienholder signing a subordination agreement, which must then be recorded in the county land records.

In situations involving judgment or tax liens, negotiating with the lienholder might be possible. Homeowners can attempt to settle the debt for a reduced amount, especially if they can pay a lump sum. If a settlement is reached, it is important to obtain a written agreement and a formal release of lien once the agreed-upon amount is paid. For federal tax liens, homeowners might need to apply for a certificate of subordination from the Internal Revenue Service using specific forms to allow a new mortgage to take priority. The specific method for addressing a lien depends on its type and the lienholder’s willingness to cooperate.

Navigating the Refinancing Process with a Lien

Initiating the refinancing process with an existing lien requires proactive steps to ensure a smoother transaction. The first practical step for homeowners is to identify all existing liens on their property. This can be done by conducting a title search through the local county recorder’s office, assessor’s office, or courthouse, where property records are publicly accessible. Title companies and real estate attorneys also perform comprehensive title searches as part of the refinancing process, which will uncover any recorded claims.

Once identified, gathering all relevant documentation related to each lien is important. This may include lien statements detailing the amount owed, payoff letters from lienholders, or any existing subordination agreements. For a lien release, the recorded document confirming the debt’s satisfaction is needed. Open and early communication with potential lenders about any existing liens is also advisable. Lenders can provide guidance on their specific requirements for addressing liens and may offer options or conditions for approval.

During the appraisal and underwriting stages of the refinance, the presence of liens will be thoroughly reviewed. The underwriter evaluates the risk associated with the property’s title and ensures all requirements for clear title are met before approving the loan. At the closing of the refinance, any outstanding liens that are being paid off through the new loan proceeds will be satisfied. The title company or closing attorney will manage the distribution of funds to lienholders and ensure that all necessary lien releases or subordination agreements are properly recorded, ultimately clearing the property’s title for the new mortgage.