What’s a Mortgage Lien?
I’m a big fan of the song “Lean on Me” by Bill Withers. In it, Withers asks you to lean on him for support. But there’s a different type of lean with a different spelling.
A lien gives an individual or entity a claim to a property until a debt is paid off. If the debt goes unpaid, they have the right to take it back. Although we’re focusing specifically on homes in this post, you could also have a lien on your car or other possession that you pay off over time.
It’s generally considered to be a bad thing if you have a lien on your property. However, I’m going to let you in on a little secret: Lots of people have one on their home.
A Deeper Dive into Mortgage Liens
Although liens generally get a bad rap, the reality is a little more nuanced than traditional thought. Let’s take a deeper dive into mortgage liens.
The first lien on most houses is actually very helpful: your mortgage.
A mortgage enables you to afford a house over time instead of paying for the entire cost upfront in cash. It gives many of us something to lean on in order to get a permanent place to put our roots down, become part of the community and maybe raise a family.
When you have a mortgage, your house is also used as collateral until you pay off the loan. As long as you keep making your payments, the collateral never comes into play, and in that case, the lien is actually beneficial.
Property Liens to Avoid
Mortgages give support, but you usually don’t want any other type of lien on your property. Which liens are bad? If they aren’t satisfied by the time you sell your house, lots of creditors have the ability to place a lien that can cause trouble later. Here are some of the most common reasons for liens:
A creditor or an individual may win a judgment against you in court and have a right to place a lien on your property until you pay. One way this might occur is if you lost a dispute with a contractor over a payment for work.
If you haven’t paid your taxes in a while, the government can also choose to put a lien on your property until you’re current on your taxes. There’s an added wrinkle with tax liens.
While most creditors will wait until the property is sold to take a portion of the proceeds to pay off your debt, the IRS has the right to place a levy on your property, meaning they can foreclose on and sell your property, if you continue to fail to make the payments.
Liens may also impede your ability to sell a property, and they show up on your credit report.
Although it’s probably not going to lead to foreclosure, you can also have a lien placed on your property if you fail to pay local property taxes.
Homeowners Association Liens
If you live in a homeowners association and don’t pay the dues, odds are the association will start by sending you letters and assessing late payment fees. If that doesn’t work, it may have the power based on the bylaws to place a lien on your property. It may even be able to progress to foreclosure, although this would be a last resort. The association may not want to go this route, though, as it would have to pay the property taxes.
You can’t take care of your liens if you don’t know about them, so how do you go about finding them? That’s a very good question.
You could start by visiting the website of your county clerk, recorder or assessor. All you would need to complete the search is the name of the property owner and the address. If your county doesn’t make the records available online, you could always make a trip to the office and have the staff help you out in person.
As an alternative, you could also consider having a title company complete a title search for you. However, this is something you’d usually only do if you’re ready to get a mortgage. You may not want to wait until then to find out, though, because it could delay or derail the process.
Liens Affecting Your Mortgage
Not only can liens affect the sale of a property, they also have the ability to kill your opportunity to buy a house or refinance your existing home.
In order to get a new mortgage of any kind, you’ll have to pay off your lien. Depending on the type of loan, this will either have to be paid prior to the time you apply for a mortgage or at closing. Additional documentation will be required to prove payoff in some cases.
The one exception to the above is that certain new FHA loans may be granted if the lien is on a repayment plan. We recommend talking to a lender to see if this applies to you.
In some instances, you may have to reestablish credit for 12 months and have a letter of explanation for all liens and judgments.
If you have a lien that could eventually turn into a tax or homeowners association foreclosure, it’s important to take care of these items before they get to the foreclosure point.
If you’re home does end up going into foreclosure, you won’t be able to get another FHA or VA loan for three years. If you’re looking at conventional loans through Fannie Mae or Freddie Mac, you would have to wait seven years after the foreclosure. You wouldn’t have any mortgage options for the first year after the foreclosure. In any case, this is something you should really try to avoid.
The clearing up of liens is just one tip we have for closing your loan without a hitch. If you still have questions, we recommend getting in touch with one of our Home Loan Experts or giving us a call at (800) 785-4788.
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