A lien represents an unpaid debt where the debtor maintains a claim against a property. During the home buying process, certain liens on a property may interfere with the owner’s ability to sell their home. A lien may also prevent a current homeowner from using their property as collateral when securing a new loan. While not all liens signal financial distress, some types of liens may raise concerns for potential homebuyers.
What is a Lien on Property?
Liens may date back to prior owners or even the home’s original builder. Typically, debtors must send the proper notification and follow state laws before filing for a lien. Those issuing the debt will attempt to collect the payment through other channels before resorting to placing a claim against a property. If the debt remains unpaid, claimants may file paperwork for the lien at the county recorder’s office.
Properties can receive liens for unpaid taxes, outstanding contractor’s bills, or financial obligations arising from legal judgments. Often, liens appear on title insurance searches during a real estate transaction. If the title agent finds information on a lien connected to a home you want to purchase, you should first ask the seller about the claim to unsatisfied debt. If the seller does not resolve the lien and you wish to move forward with the purchase, you may need to contact the business or individual who filed the lien and work out a settlement to remove the lien before the sale.
Debtors place liens on properties, not individuals. If someone who receives a lien against their property sells their home, the lien does not follow them. However, it could complicate selling the home, and they may need to resolve the debt to move forward with the process.
What Happens to Unsatisfied Liens?
In worst-case scenarios involving significant debt, the claimants may move toward a foreclosure on the home. The lien holder could attempt to force a sale of the property or try to take possession to place the home up for auction. The sales proceeds would fund the repayment of the debt.
Voluntary vs. Involuntary Liens
Homeowners may consent to some collateralized loans, such as mortgages. Borrowers provide consent when signing the legal documents to obtain their mortgage. When the borrower pays off the mortgage, they satisfy the lien. A borrower who sells their home can use the funds from the sale to pay back their mortgage, removing the lien from the property.
Involuntary or non-consensual liens do not require authorization from property owners. These liens may relate to outstanding tax bills or unpaid bills from a contractor or builder. An involuntary lien may also result from a court judgment against a property owner.
Who Can Put a Lien on Your House?
Debtors cannot place a lien against a property without following a state-determined process. Usually, creditors will file legal claims before placing an involuntary lien on a property. Anyone placing a lien on a property must follow statutory requirements to ensure the claim’s validity.
In addition to lenders or contractors, other parties, like a homeowners’ association (HOA), may also file a lien connected to unpaid bills. Additionally, the IRS and other government organizations can place a lien on your home after tax bills remain unpaid for a certain period.
Generally, claimants will attempt to collect debts using other measures before filing a property lien. Typically, state laws govern the lien process. Individual states may permit some or all of the following claimants to place liens on a home:
Tax Authorities
The IRS or a local tax authority may place a tax lien on a property for unpaid taxes. When property taxes go unpaid for a long period, the local tax collector may also have the authority to initiate a tax lien sale of the property and use the proceeds to pay the amounts owed.
Contractors or Builders
Contractors may place what’s known as a mechanic’s lien on a property for unpaid bills related to home construction, repair, or renovation. In cases involving a dispute over the quality of craft, homeowners may need to involve an attorney to help resolve the matter and remove the lien. Those who take out a home equity line of credit (HELOC) and do not repay the balance will also risk a lien.
Mortgage Lenders
Mortgage lenders ask that borrowers consent to a voluntary lien during the loan term. This lien holds the lender’s claim on a property until the loan terminates. Borrowers will consent to these liens at the time the loan closes.
Legal Courts
Judgment liens arise from court cases and remain attached to property until the matter settles. Cases do not have to relate to matters of the property for a lien to go into effect. For example, unpaid court-ordered child support may result in a lien.
HOAs
If a homeowner falls behind on their association fees, the HOA may place a lien on the property for the outstanding amount. If the home sells, the buyer may need to pay the outstanding HOA dues to obtain a clear title.
Learn more: Can Your HOA Evict You?
Municipal Authorities
Some unpaid services, such as the sewer utility, may result in a lien placed on the home by the municipal authority. In New York City, unpaid water and sewer bills may result in a lien.
How Can You Find Liens on a Property?
If you want to investigate the current liens or potentially lienable items on a property, you have several options:
- Title search: Ask a title agent to run a preliminary title search. The title search will report any claims against the property that may interfere with a future sale.
- Closing documents: If you’re purchasing a property, the title agent will list any outstanding payments for lienable items on the settlement sheet. The liens may include unpaid HOA dues, sewer bills, property taxes, or invoices from builders. The seller and buyer should agree on which party will take care of these items before closing.
- Property record search: You can also research a property by requesting information on existing liens at your local county recorder’s office. If you have access to online property records, you may also want to run a search for liens.
What Should You Do Before Buying a Property with a Lien?
Liens will often require the debtor’s written release before their removal. State laws differ on handling and resolving liens, so you may wish to consult with an expert, such as a real estate attorney, before moving forward with a home purchase. Financially distressed sellers may request that a buyer take care of a lien as a condition related to a short sale purchase.
Satisfying a lien may entail paying off the debt in full. In this case, you should request an official written notification stating that the debtor released the lien.
You may also want to contact the company or individual that placed the lien and attempt to strike an alternative resolution. If the lien resulted from the actions of a prior owner, you can request that they pay off the lien before transferring the property to your name.
You can also investigate the lien’s history to determine if the claimant gave proper notice and followed all statutory requirements. In some states, such as California, you may have the right to petition the court and request the removal of an invalid lien.
Conclusion
Understanding the purpose of liens can help you to determine the best way to resolve past debt associated with a home. Lenders often require a clear title before they will approve a mortgage loan. If you want to purchase a home and your title agent uncovers an outstanding lien, you must resolve any debt issues before settlement.
