What is a lien?
A lien is a notice attached to your property which puts everyone on constructive notice that a creditor has a claim. A lien is typically a filed and recorded in the county public records (if involving real property) or with the secretary of state (if involving personal property). Why does a lien help a creditor? Well… in order to sell or refinance the property, the borrower’s lender is going to require clear title on the property as a prerequisite to the loan. Thus, a lien existing on your house has the negative effect of clouding the title and thus prevents you from selling your property. In order to clear title on the property, you must pay off the lien and have a release filed in the county public records putting everyone on notice of the discharge of indebtedness. If the lien is not paid off, certain lien holders can choose to foreclose on the property and recover what they owe.
The 7 Most Common Types of Liens
- Property Tax Lien: When a homeowner fails to pay the taxes on his property then the city or county in which the property is located has the authority to place a lien on the property and force a sale if the taxes are not paid.
- IRS Lien: An IRS lien is filed by the federal government for the failure to pay your taxes. If you happen to have equity in your property, the tax lien can be paid out of the sales proceeds at the time of closing. If the home is being sold for less than the lien amount, the taxpayer can request the IRS discharge the lien to allow for the completion of the sale. The taxpayer can also can ask that a federal tax lien be made secondary to the lending institution’s lien to allow for the refinancing or restructuring of a mortgage.
- Mechanics’ Lien: A mechanic’s lien is a statutory lien that secures payment for services and labor and materials related to improvements performed on real property. State statutes creating mechanics’ liens vary by state. These statutes provide for the criteria and circumstances required for creating, filing and perfecting mechanics’ liens. Mechanic’s liens are usually classified as super liens meaning they may be superior to all existing liens previously recorded against real property, including a mortgage lien intended to be a first priority lien.
- HOA Lien: Homeowners that live in a covenanted community will often be required to pay a periodic fee to the HOA to cover maintaining the community. For example, the HOA will collect fees to pay for things like landscaping, security, or maintaining the common areas such as pools, tennis courts, workout rooms, and clubhouses. To determine the amount that each homeowner must pay, the HOA will typically develop a budget and divide the total expenses by the number of homes in the community. The homeowner must pay his share on a predetermined basis throughout the year. Additionally, the HOA may levy special assessments for one-time expenses if the HOA’s reserve funds are inadequate. For example, an HOA may levy a special assessment to pay for a new road that is damaged or to replace the guard gate. If the homeowner becomes delinquent in paying their monthly fees or special assessments, a lien will be filed by the HOA and automatically attach to the homeowner’s property. This lien cloud’s title on the property and can be foreclosed in order to satisfy the debt.
- Judgment Lien: A judgment lien is a type of lien that is created upon recording when a lawsuit is won against you and then attached to your property in order to receive payment upon the sale of it.
- Utility Lien: A lien filed upon a property by the city or utility service for failure to pay a utility bill such as water or electricity.
- Divorce Lien: A lien filed upon the property as the result of a divorce decree.
Are all liens the same?
What is the foreclosure process?