What Is A Lien?

A lien is a financial claim on a property initiated when a person owes money and removed when the debt is repaid.

A Longer Definition: Lien

Liens are legal claims on property, attached when a person owes a debt and removed when the debt is repaid. Liens are public record.

As a real-world illustration of how liens work, when a first-time home buyer buys a home with mortgage financing, the buyer’s lender puts a lien on the property and files the lien with a local government. The lien exists so long as the mortgage exists. When the homeowner sells the home and pays off its mortgage, the lender releases its lien and all claims to the home.

Placing a lien on a property is marking it with a metaphorical flag. The flag indicates that the property owner owes money. Notably, though, liens are tied to properties, not owners. They exist until the property is sold or transferred and the underlying debt is paid in full.

Liens are initiated for various reasons, depending on the debt type involved. They are security measures for creditors and signals to potential buyers or inheritors of the property.

The federal government can also file liens for unpaid income taxes.

4 Real Estate-Related Lien Types

There are four common lien types in real estate. Each has specific legal requirements for their establishment, enforcement, and release.

Mortgage Lien

When you take out a mortgage to buy a home, your mortgage lender places a lien on your property until the mortgage is fully paid off via a home sale or a refinance. Mortgage liens give lenders legal rights to repossess and sell the property if you default on your mortgage payments.

Tax Lien

Tax liens are liens placed on a property for unpaid taxes due. When a homeowner fails to pay property taxes to a local government, the municipality can place a lien on the property to ensure future payment. The lien must be satisfied before the property can be sold or refinanced.

Mechanic’s Lien

A mechanic’s lien is used by contractors or suppliers who have not been paid for work done or materials provided on a property. Mechanic’s liens must be paid before a home can be sold or refinanced, and ensure that parties can recover the cost of their labor or materials.

Judgment Lien

Judgment liens are issued in court rulings where a debtor is ordered to pay a creditor a sum of money. If the debtor fails to pay the creditor, a judgment lien can be placed on their property to secure the judgment amount. Judgment liens must be paid before a home can be sold or refinanced.

Liens: A Real-World Example

First-Time Home Buyer Stories: Liens

Consider a homeowner with a mortgage who wants to refinance their home. Refinancing a mortgage involves replacing the existing mortgage with a new one, often to take advantage of lower mortgage rates or reduce monthly payments. Liens on the property must be satisfied before the refinancing can occur.

In this scenario, the homeowner satisfies the existing lien from the old mortgage with funds from the new mortgage. If there are other liens on the property, such as a mechanic’s lien from recent home improvements or a tax lien for unpaid property taxes, these must also be paid or accounted for as part of the mortgage refinance.

Frequently Asked Questions About Liens

What is a lien?

A lien is a legal claim or right against a property used as security to pay a debt. Liens ensure creditors get paid what they are owed.

How does a lien affect property ownership?

Liens do not transfer property ownership, but impose a financial claim on the property. Liens must be paid off before the property can be sold or refinanced.

Are there different types of liens?

Yes, there are various types of liens, such as mortgage liens, tax liens, mechanic’s liens, and judgment liens, each with specific applications.

What happens if a lien is not satisfied?

When liens go unsatisfied, a creditor may force the sale of the property or take possession of it to recover the owed amount.

Can a lien be contested?

Yes, property owners can contest a lien if they believe it is invalid or unjustified. This typically involves legal proceedings.