A quick briefing on liens and what they mean for closing on a house.
If you’re in the home buying process or selling a new home and you’ve had a lien filed on the home or property, we’re here to break it down for you.
What Is a Lien?
According to U.S. law, a lien is a “charge against or interest in property to secure a payment of a debt or performance of an obligation.” In other words, a lien is a claim on something you own as a security against a debt you owe.
In the process of closing a home, the lender or prospective buyer will run a title search. Lien filings are public records, which means they’ll show up during the search. If a lien shows up during a search, the lender or prospective buyer will not want to take the property. Liens are typically attached to and transferred with the property.
What are the Types of Property Liens?
What is a tax lien? Tax liens are involuntary, meaning that the lien was placed on someone’s property without the consent of the property owner. The IRS and other government entities will put a tax lien on an individual or company that fails to pay their taxes. These liens don’t typically result in foreclosure, but they will stay on the property to ensure they’re paid.
A mortgage is a “secured loan” that is used to purchase or refinance a home. Secured loans create a mortgage lien on the program or a contract in which the borrower promises some collateral to secure the loan if the borrower stops making payments.
For mortgages, the collateral is the property. The lender could take possession of the home and foreclose on the property to pay off the balance of the mortgage if the borrower were to stop making payments.
Involuntary mechanic liens, created through statutory rights, arise when a contractor, material supplier, equipment lessor, or other type of professional provides services for the construction or repair of real property. Those parties can file a lien against the property being improved if they do not get paid.
Since these are statutory liens, each state has laws giving construction businesses and laborers the right to claim a mechanics lien. However, each state has specific notice requirements and deadlines that must be met to secure these rights, meaning that the window to file a mechanics lien doesn’t last forever.
The Uniform Commercial Code, or UCC, is a set of uniform laws that govern commercial transactions in every state and across state lines. A UCC filing, also known as a UCC lien, can be submitted with the secretary of state by anyone who lends money to another party. The lien puts a claim on a specific piece of property until the debt is repaid.
These liens are a direct result of a lawsuit. In other words, if a person is a party to a case and loses, the court will award damages as a money judgment. The judgment is the basis of the lien; the judgment creditor can place a lien on the debtor’s property if the damages aren’t paid.