If you're considering refinancing, you may wonder if you can refinance if you have a lien against your property. Even if you pay your debt and have the lien released, it can come back to haunt you when you want to obtain credit. Navigating a property refinance with a lien attached to your home can be stressful, but it can help to know the facts about how it can affect you and your chances of refinancing.
How a Lien Can Affect You
A lien against your property can happen in several different ways. Two types of liens are mechanic's and tax liens. The most common type of lien is a mechanic's lien, in which a general contractor, home repair company, or subcontractor is not paid for work done on your house. Tax liens typically result from unpaid property taxes on your home, but could also come in the form of a federal tax lien relating to income tax, gift tax, or estate tax. Having a lien on your home basically means that you can't sell the property until you take care of the debt and the lien is removed.
Selling or Refinancing With a Lien
If you're trying to sell your property with a lien on your home, you can kiss that sale goodbye. You can't legally sell a property with a lien against it. Although you're not strictly prohibited from refinancing, it can be extremely difficult to refinance your home under these condiions. In addition to these restrictions, you could also be restricted from getting approved for a mortgage in the future. Why? A lien subjects your home to legal liability, which means that your property could be sold and the proceeds used to pay whatever debt caused the lien.
Obtain Your Current Credit History
Although it's a tough situation to navigate, refinancing while your property has a lien against it is possible. First of all, order copies of your credit report from all three credit reporting agencies. You're entitled to one free copy each year. Scour your history and if you paid off the lien, make sure your credit report shows that. If it's incorrect, contact the credit bureau in question to dispute it, and be prepared to show evidence that the lien is paid.
Refinancing With a Tax Lien
If it's a federal tax lien that's tripping you up, know the facts. When the IRS files a tax lien, they have first rights to the value of your home. Therefore, any mortgage lender refinancing your home won't feel comfortable lending you money while being second in line to the IRS in case of foreclosure. To alleviate this, contact the IRS and ask about the possibility of getting a Certificate of Subordination. This basically means that the IRS is agreeing to get in line behind the mortgage lender refinancing your home. The IRS will agree to this if your tax debt is paid with the proceeds of the refinance -- that is, in the equity your home has.
Property tax liens are also very common types of tax liens, which are liens against the property when property taxes aren't paid. This is the reason most mortgage lenders require escrow payments for taxes and insurance on your mortgage. If you have a property tax lien, the easiest way to deal with it during your refinance is to pay it off.
Refinancing With a Mechanic's Lien
If you have a mechanic's lien on your property, you have two options. The first is to contact the lien holder to see if the mechanic's lien claim could be subordinated to your refinancing company. If you have a good working relationship with the lien holder and have made payments on time, he might be willing to work with you. However, you would have to convince your new lender that it would be in their best interest to grant you a loan on a property with a lien. The odds of you proving this to a lender are slim, and you'll likely find that lenders won't give you a loan with the outstanding claim.
The other, more likely way to navigate a mechanic's loan is to pay off the debt to have the lien released. Be aware that even after it's removed, the lien stays on your credit for seven years and can severely negatively affect your credit, as well as the ability to get approved for a new home loan.
Lisa Carlson works as an associate director of recruitment and graduate programs at a public university, and has experience in management, marketing, personal finance and nonprofit organizations. She is a peer-reviewed author on publications for higher education recruiting and holds a B.S. in marketing and a M.B.A.