A lien on a house gives a creditor the legal right to foreclose and take the property. Liens include mortgages, tax liens and judgment liens resulting from creditor lawsuits. Liens stay with the house, so if you buy property with a lien, you become responsible for settling the debt. Lenders don't usually write mortgages for houses with liens, as the lienholder would get paid first if the lender foreclosed.
When your bank doesn't want to write you a mortgage, seller financing offers an alternative. With a contract for deed arrangement, for example, you pay the seller every month instead of a bank. The seller keeps title to the property until you pay the purchase price, plus interest. The seller is the one who loses out if you default, so she'll probably ask a higher price. When dealing with liens or other problems, however, she can be much more flexible than a bank loan officer.
Paying It Off
If you want a mortgage from a commercial lender, paying the lienholder is a simple way to get rid of the lien. When you buy a house with a mortgage lien on it, for instance, the seller can take what the bank pays him and use it to pay off the mortgage. If there's a judgment lien or a tax lien on the land, ask the seller to settle the debt as a condition of the sale, so that you can take out your mortgage.
Removing the Lien
There are ways to get rid of a lien without paying the creditor. Liens have a time limit: If the deadline is close, wait until it expires before applying for a mortgage.Some lienholders don't follow proper legal procedure; if there's an error in the filing, that can invalidate the lien. You can also ask the seller to speed things up by filing a "contest of lien" that requires the lienholder to file suit promptly or lose her claim.
Even if you can finance a house with a lien on it, it's a risky choice. If the lien is still valid, the lienholder can foreclose and take title. Title insurance policies, which pay if you have to defend your ownership in court, protect against unknown title problems: If you buy a house knowing about the lien, the insurer may exempt it from coverage. Looking for a lien-free house you like almost as much is a safer bet.
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