Whether you're buying a house with a lien or you already own a house with liens, you can typically borrow money against the property if you either pay off the existing liens or if you have equity in the home. When you sell a house with liens, you have to pay all the liens in full to convey clear title unless the creditors consent to receiving less. If you simply want a home equity loan or second mortgage, you can get one if you qualify and if your house appraises for enough value.
What Is a Property Lien?
A lien is a type of security interest that attaches to property. A lien can attach to real property, which includes buildings and land, or personal property, which includes everything that is not real property. Liens can attach to property either voluntarily or involuntarily, depending upon the type of lien. Liens protect creditors in the event that you don't pay back the debt, as they can take the property and sell it using procedures set forth in your state's laws.
Types of Property Liens
A home mortgage is a type of property lien. When you borrow money to buy a house or refinance an existing mortgage loan, you grant the lender a mortgage on the real estate. A mortgage is given voluntarily, so it is a consensual lien.
Liens that attach involuntarily, or non-consensual liens, include things like IRS tax liens, state tax liens and judgment liens. For example, if you amass debt owed to the IRS for unpaid taxes, the IRS can record a Notice of Tax Lien in your county and a lien will attach to everything you own in that county. If someone sues you and gets a money judgment against you, that judgment may become a lien on all real estate you own, depending upon your state's laws.
Understanding Lien Priority
Property liens are paid in order of priority, which is generally governed by whichever lender recorded its lien first. For example, if you buy a house, the mortgage will be the first lien. Tax liens and judgment liens may come second. If the mortgage company forecloses and the house is sold at a sheriff sale, the mortgage company will be paid first, and the other liens will only be paid from whatever is leftover, in order of priority.
Selling a Home Encumbered by Liens
When you sell your house, typically the buyer will want to receive the property free and clear of all liens. Most home sale transactions involve passing title by warranty deed, which is a type of deed that promises the property is unencumbered at sale. In a typical home sale, a title company will run a title search and find out how much all the liens on the property are, and the buyer will need to pay enough for the home to pay them all off. The title company will provide title insurance so that if other liens pop up that the title company didn't catch after the sale closes, the insurance will take care of those liens.
Paying Less by Short Sale
In some cases, a seller cannot sell the home for enough money to pay all the liens, usually due to problems with the housing market. In that case, if the situation is dire enough, the mortgage company may agree to take less than the full amount due in exchange for releasing its mortgage and allowing the seller to convey clear title. Sellers can also negotiate with the IRS and judgment creditors to release the liens for less than the amounts owed.
Buying a House With a Lien
If you want to buy a property and there is a lien on the house from the previous owner, while paying enough for the property to pay off the liens is one option, another option is assuming the previous owner's debts. With the consent of the lenders and other creditors, you can sign paperwork to take over the prior owner's mortgages.
The owner can also quitclaim the property to you. A quitclaim deed is a type of deed that conveys only what the owner has; if a property is encumbered by liens and is transferred by quitclaim, all the liens go with the property including tax liens, judgment liens, mortgages and mechanics' liens. Paying for property and taking title by quitclaim deed is risky, so if you do so, run a title search to see what you're getting into.
Home Equity Line of Credit Mortgages
If you already own your home and simply want to borrow more funds against it, you may be able to get a home equity loan or a home equity line of credit (HELOC). A potential lender will appraise your house, and if it looks like the house is worth more than the balance due on your first mortgage, the lender may allow you to borrow up to the amount of that equity. The lender then receives a mortgage on the house that is behind the first mortgage and any other existing liens.
Rebecca K. McDowell is an attorney focusing on creditor and debtor law. She has a B.A. in English and a J.D.