Homeowners

What Is a Lien on a Home? What Homebuyers and Homeowners Should Know

When you hear the word “lien,” it may conjure up all sorts of unpleasant thoughts about unpaid debts. The reality, however, is that not all liens are bad. In fact, the biggest lien you’ll likely ever have is a mortgage on a home.

A lien is when a creditor puts a legal claim on a property or asset to have a debt repaid. If the borrower doesn’t repay the debt, the creditor may have the ability to take control of the asset and sell it to recoup what they’re owed.

“[It] is a claim that a third-party files against your property as part of an effort to collect on a debt that you owe them,” said Ryan Byers, a civil litigation attorney at Rammelkamp Bradney in Jacksonville, Ill. He has handled numerous lien matters, including foreclosing on liens and filing lawsuits to have them invalidated.

Liens can be something you agree to, such as a home loan. Others can come from unpaid taxes, overdue bills, late homeowner association dues, or a contractor who claims they weren’t paid. Those are the ones that can catch you off guard.

Understanding what a home lien is, how liens work, and how to clear one from your property, can help you protect your home and keep it from becoming a problem later.

What is a lien on a home?

A lien on a property is a legal claim tied to your home that allows a creditor or lender the right to collect from your property or assets if you fail to repay a debt. Home liens typically fall into the following two categories:

• Voluntary lien: This is a lien you consent to having. The most common example is your mortgage. Remember, when you take out a mortgage, you pledge your home as collateral. This gives your lender a lien on the property until you pay off the loan.
• Involuntary lien: This lien is placed on your assets that you may not want. These are sometimes ordered by a court. For example, if a contractor or other service provider doesn’t get paid for work on your home, they may file a mechanic’s lien. Similarly, unpaid taxes can result in a state or federal tax lien. A creditor who sues you and wins can attach a judgment lien for money owed. Even overdue homeowners association (HOA) dues could lead to a lien on your property. Simply put, an involuntary lien gives a creditor or lender a legal path to collect what you owe. And if the debt isn’t repaid, it could put your home at risk of foreclosure.

What happens if you don’t pay off a lien

If you don’t pay the debt tied to a lien, the lender or creditor may be able to take your property to recover what you owe.

“First, it may prevent you from being able to use your home as collateral to borrow money,” said Byers.

“Second, if you attempt to sell your home and it has liens against it, those liens will usually have to be satisfied out of the proceeds of the sale,” he said. “Third and most significantly, lienholders often have the right to foreclose on their liens.”

“Though most foreclosure procedures include safeguards for homeowners and opportunities to pay off the lien before you lose your home, in a worst-case foreclosure scenario, the home can be sold out from underneath you.”

How to remove a lien

You usually have a few options for removing a lien on your home.

If the lien is legitimate, the most direct option is to pay off the debt. Start by contacting the lienholder and asking for the exact amount needed to clear the lien. If you can’t pay it all at once, ask whether they will let you make payments over time.

When paying in full isn’t possible, you may be able to work out a settlement with your lender for less than the total amount owed. Some lenders may be more open to this if you can make a single lump-sum payment.

If you believe the lien is wrong, you can challenge it in court. If the lienholder can’t show that the lien is valid, a judge may remove it.

Once the debt is resolved, the lienholder files a release that clears the lien from your title.

What a lien means when you sell your home

You can sell a home with a lien on it, but the lien is typically paid from the proceeds at closing so the buyer takes clean title. This means there should be no debts tied to the property.

“A home can be sold, but the lienholder must be contacted to request a payoff and then paid at closing, so that the buyer acquires title free and clear of this lien," said Jacqueline Salcines, a real estate attorney at Salcines Law in Miami.

Say you sell your home for $400,000. But you have a $200,000 mortgage and there is a $50,000 lien on the property. You would pocket $150,000 after the remaining mortgage and the lien were paid off. 

A lien is less likely to slow down a sale when the sale price is high enough to cover what’s owed, because the lienholders can be paid at closing. However, a home sale can stall when the liens are worth more than the home, or when lienholders argue over who gets paid first.

“Even if there are not arguments about lien priority, if there is not enough money to satisfy all lienholders, then in order for the sale to go through, there will have to be some sort of negotiation with the lienholders to determine whether and under what circumstances they will be willing to release their liens for less than full payment of the amount owed,” Byers said.

What homebuyers should know about liens

When you’re buying a home, a title company usually runs a search to surface any claims on the property before you close. Many buyers are surprised when the title search turns up issues. But they are quite common.

Nearly 60% of transactions require clearing three to five title issues before closing, according to the American Land Title Association (ALTA).

“The role of finding liens and satisfying them is that of the real estate attorney,” said Salcines. “We do that when representing buyers and then coordinate with the seller to obtain a payoff to satisfy them at closing.”

When a title search finds a lien, it’s generally the seller’s responsibility to fix it. A homebuyer may be able to require them to clear it before closing, and depending on their contract, they could have the right to walk away if the seller can’t resolve it.

The key with any home lien is finding it early, so it doesn’t become a problem that derails your sale.