Do Property Tax Liens Take Priority Over Mortgages?

Owning a home involves balancing two financial responsibilities: a mortgage and property taxes. While homeowners understand these are regular payments, few consider what happens if property taxes go unpaid, raising a question about which debt holds a superior claim. The priority of these claims determines who gets paid first if the property is sold to satisfy the debts, a situation with major financial implications for the owner and the lender.

The General Rule of Lien Priority

A property lien is a legal claim against a property for an unpaid debt. When you finance a home, you grant the lender a voluntary lien, known as a mortgage, which is recorded in public records. This recording is not just a formality; it establishes the lender’s place in line for repayment. The principle governing the order of repayment for most liens is “first in time, first in right,” which dictates that liens are prioritized based on their recording date.

Imagine a homeowner has a primary mortgage recorded on their property. A few years later, they take out a home equity line of credit (HELOC), creating a second, or junior, lien. If the homeowner defaults and the property is sold through foreclosure, the proceeds from the sale would first go to satisfy the outstanding balance of the primary mortgage. Only after that debt is paid in full would any remaining funds be used to pay off the HELOC.

Property Tax Lien Super Priority

The “first in time, first in right” rule has a significant exception: property tax liens. These liens are granted “super priority,” a status that allows them to jump to the front of the repayment line, taking precedence over all other liens, including a previously recorded first mortgage. A property tax lien is an involuntary lien, meaning it is placed on the property by a government entity without the owner’s consent when taxes become delinquent.

The rationale for this elevated status is public policy. Local governments rely on the consistent collection of property taxes to fund public services such as schools, police and fire departments, and infrastructure maintenance. To ensure this revenue stream is secure, the law gives the government’s claim for unpaid taxes priority over the claims of private lenders.

Consequences of an Unpaid Property Tax Lien

When a property tax lien is placed, it gives the taxing authority the power to initiate a tax sale or tax foreclosure to collect the delinquent amount. This process involves the government selling either the property itself or the lien to a third-party investor. Because the tax lien holds super priority, a tax sale can wipe out the mortgage lender’s interest in the property entirely.

If the property is sold at a tax sale, the proceeds are first used to pay off the tax debt. The sale can extinguish the mortgage lien, meaning the new owner acquires the property free of the mortgage claim. This leaves the lender with an unsecured debt and potentially a total loss on their loan.

The Role of Mortgage Escrow Accounts

To protect their financial interest from the super priority of tax liens, mortgage lenders commonly require borrowers to have an escrow account. An escrow account is a separate account managed by the lender to pay property-related expenses for the borrower. A portion of the homeowner’s monthly payment, one-twelfth of the annual property tax bill, is deposited into this account.

When the tax bill is due, the lender uses these funds to pay the municipality directly. This system ensures timely tax payments, preventing a tax lien from being placed on the property. For the lender, it is a risk management tool that safeguards their collateral, and for the homeowner, it offers the convenience of breaking down a large annual expense into smaller monthly payments.