What Is a Lien on a House and How Does It Affect You?

Liens on a house can significantly impact property ownership and financial decisions. These legal claims, often arising from unpaid debts, can complicate selling or refinancing a home, as they must typically be resolved before such transactions can proceed.

Reasons a Lien Is Filed

Liens are filed to ensure creditors recover unpaid debts. A common reason is unpaid property taxes. Local governments may impose a tax lien to secure owed amounts, and if taxes remain unpaid for a specified period, the government can initiate a tax sale to recover the debt.

Contractors and suppliers file mechanic’s liens when not compensated for work or materials, particularly in the construction industry. For example, if a homeowner fails to pay a contractor for a kitchen renovation, the contractor may file a mechanic’s lien to secure payment.

Judgment liens result from court rulings that award monetary damages. If the debtor fails to pay, the creditor can file a lien against the debtor’s property, potentially leading to its sale to satisfy the debt.

Types of Real Estate Liens

Real estate liens come in various forms, each with distinct implications for property owners and creditors. The primary categories include mortgage liens, tax liens, and judgment liens.

Mortgage Liens

Mortgage liens arise when a borrower takes out a loan with the property as collateral. This gives the lender a legal claim to the property, ensuring repayment. If the borrower defaults, the lender can initiate foreclosure. For instance, in California, non-judicial foreclosure typically takes about 120 days from the notice of default to the property’s sale.

Tax Liens

Tax liens are imposed by government authorities for unpaid taxes and often take precedence over other claims. For example, the federal government can place a lien on a taxpayer’s property under the Internal Revenue Code Section 6321. In New York City, unpaid property taxes can accrue interest at rates as high as 18% annually. Investors may purchase tax liens at auctions, banking on the property owner’s repayment or the opportunity to acquire the property through foreclosure.

Judgment Liens

Judgment liens stem from court rulings awarding monetary damages. If the debtor does not pay, the creditor can file a lien against the property. The process varies by state but generally involves recording the judgment with the county recorder’s office. For example, in Texas, a judgment lien remains valid for ten years and can be renewed.

Effect on Ownership and Financing

Liens encumber property titles, preventing owners from freely transferring or refinancing the property until the debt is resolved. This can deter potential buyers due to the added risk and costs, reducing the property’s marketability.

From a financing perspective, liens can hinder borrowers from securing favorable loan terms. Lenders view liens as risk factors, potentially leading to higher interest rates or loan denials. For investors, properties with liens may offer lower purchase prices but require resolving the lien, which can involve significant legal and financial effort.

Priority Among Multiple Creditors

When multiple creditors hold liens on a property, the order of priority determines the sequence of payments from a sale’s proceeds. The “first in time, first in right” rule generally governs lien priority. However, tax liens often supersede others due to the government’s preferential status in debt recovery.

Subordination agreements can alter lien priority. These agreements, often used in refinancing, allow a creditor to voluntarily subordinate their lien to another. Entering into a subordination agreement requires careful evaluation of its risks and benefits.

Methods to Remove or Dispute a Lien

Removing or disputing a lien is often necessary to clear a property’s title. The approach depends on the lien type, the underlying debt, and the legal framework governing the claim.

Paying off the debt is the most direct method of removing a lien. For example, a mortgage lien can be resolved by paying the outstanding loan balance. Once the debt is paid, the lienholder must release the lien by filing a lien release document with the county recorder’s office.

Disputing a lien typically requires legal action. Homeowners may challenge a lien if they believe it was improperly filed or if the debt is invalid. Legal disputes often involve filing a “quiet title” lawsuit, seeking a court order to remove the lien.

Checking for Existing Liens

Before purchasing a property or engaging in financial transactions, verifying whether any liens exist is essential. A thorough lien search can prevent unexpected liabilities and ensure a clear property title.

The most reliable method is a title search by a title company or real estate attorney. These professionals examine public records for encumbrances and often provide title insurance to protect buyers and lenders against undisclosed liens discovered later.

Alternatively, individuals can perform preliminary searches using online databases or by visiting the county recorder’s office. However, self-conducted searches may miss unrecorded or improperly indexed liens, so professional assistance is recommended for comprehensive due diligence.