Types of Liens, Their Origin and Potential Consequences When Buying or Selling a Property
May 05, 2017In a previous blog post: What Is a Title Lien and How Can a Title Company Help Protect Your Real Estate Investment?, we discussed what a title lien is and briefly mentioned the different types of liens that can affect a property's title. In this entry, we've decided to expand on the topic and talk about the different types of liens, their origin, and the potential consequences of buying or selling a property that has a lien attached to its title.
In a broader sense, there are two types of liens, voluntary liens and involuntary liens. As explained in the abovementioned post, voluntary liens are attached to the property's title when the owner agrees, upon establishing a contract, usually to grant credit. Voluntary liens are also known as consensual or contractual liens. On the other hand, an involuntary lien is attached by law, without previous consent or agreement by the owner.
Now, there are different types of voluntary and involuntary liens:
Voluntary liens can be purchase-money security Interest and non-purchase-money security Interest liens.
Purchase-money Security Interest Lien This type of lien is drawn when a creditor or lending institution finances the purchase of property. The property itself becomes the collateral on the debt. This type of lien let lenders repossess what has been bought with the funds credited. Some examples of this type of lien are a first mortgage on a home and a car loan.
A Non-Purchase-Money Security Interest Lien is attached to a property that the person seeking a loan already owns to be used as collateral. Some examples of this type of lien include a second mortgage on a house.
Both types of voluntary liens tend to be non-possessory, which means that the property owner remains in possession of what was used as collateral while he or she pays off the debt. However, there are some types of voluntary liens where the creditor does take possession of the property, such as pawn shops.
Involuntary liens can be classified as tax liens, judgement liens, mechanic's liens, and child support and alimony liens.
A Tax Lien is attached to a property when a government entity has a legal claim on the asset or assets of a person that has failed to pay their taxes. It can be placed against the property by local, state, or federal government to secure the payment of late property, income, and estate taxes. This is the last resource used to make a taxpayer comply with the back taxes they owe. Tax liens have priority over any other liens or claims on properties, even mortgage lenders and even if it was placed later. If taxes are not paid, the government can sell the home to pay off the debt. That is why in some cases, the mortgage lender will assume the tax pay and add it to the loan. This lets their lien be prioritized over any other, and secure repayment in case of sale.
A Judgement Lien is a type of involuntary or consensual lien that is attached to your property when you lose a lawsuit filed against you that involves you paying money to the winning party. It can be made against an individual or a business. This type of lien gives the creditor, once he has won the lawsuit, access to the debtor's business, personal, or real estate property to pay the debt. A judgment lien grants the creditor access to proceeds from the sale of the debtor's property, it is a way to ensure the winning party receives what they are owed.
In many states, the beneficiary of the judgement has to record it by filing it with the county or states recorder's office. In some states, however, the judgement lien is automatically filed on the property or properties record.
These types of liens can be attached even to property acquired after the court ruled against the owner.
A Mechanic's Lien is a type of involuntary lien that is used when there is no payment for home improvement labor or materials. Mechanic's liens are prioritized over mortgage liens or trust deeds, as such, a mortgage loan cannot be paid back until the worker or supplies/services are paid for. It is used to secure interest in the property; if the owner attempts to sell it, what the contractor or supplier is owed will be paid from the proceeds Moreover, this type of lien—when attached to a title—can delay, or even prevent the sale of a property unless the debt is covered.
Mechanic's liens are commonly used by subcontractors and suppliers, and it is irrelevant if the owner has already paid the contractor. If they had failed to pay the subcontractors or suppliers, they can place a lien against your property to get their money.
Child Support and Alimony LiensAn ex-spouse who has not been paid the duly child support and alimony by their former spouse can place a lien against their property. The spouse or child who are owed the money are not necessarily able to get it in the short term, but a property lien ensures that if the person who owes the money ever becomes a property owner, at some point they will have to pay and settle the debt.
What happens if you want to buy or sell a property with a lien attached to it?
If you are trying to sell your property and you are aware, or find out in the process, that there is a lien attached to it, this should be disclosed to any interested buyer; it is highly likely that it will be discovered before the transaction is closed.
Depending on the type of lien and the type of buyer, they might agree to purchase it under certain conditions. However, the buyer or the lending institution will usually refuse to close the transaction until the creditor issues a release for the lien.
If you are a buyer, on the other hand, purchasing a property with a lien attached to its title can go two ways: it may have grave consequences or it may not. You can use this as leverage to get a better deal, but even if you agree to pay the debt of the attached lien, there is no guarantee you'll be able to buy the house.
Lending institutions will not approve loans to buy a house that has a lien attached to its title; they can't secure the payment of their money because other liens might have priority over the mortgage lien. For example, if there is a tax lien on the property, this has priority over the mortgage. So, if a home is foreclosed due to back taxes, then the buyer loses the property and the bank is usually unable to force the lender into paying the mortgage unless legal action is taken.
It is difficult to know which way it might go, unless you're knowledgeable in the matter. That is why it is important to work with a reputable real estate agent and an experienced title company. They can help you sort everything out if the property you are looking to buy is worth the hindrance in the long run.
Key Title & Escrow is a renowned provider of title and escrow services in Miami that can help you with your title and escrow service needs. Give us a call at (305) 235-4571 or fill out the contact form. One of our representatives will be happy to answer any questions you may have. You can also follow us on your favorite social media: find us on Facebook as Key Title & Escrow or follow us on Twitter @KeyTitle_Escrow