Many home owners and potential buyers have never heard of a lien, or at best, vaguely understand a lien’s implications. If you own a home or are in the process of purchasing one, it’s important to understand how real estate liens can cloud the title to property. A lien is a claim that one person or an entity has on a property belonging to someone else for the purpose of securing payment of a debt.
Mortgage Liens
The most common lien is a contract between creditor and debtor. The bank that holds your mortgage has a lien on your property. In order to borrow money from the bank, you put up the home as collateral on the loan and voluntarily enter this agreement. Although you may not have thought of it in such terms, a mortgage is indeed a lien.
Tax Liens
A tax lien is one that the government puts on your property when taxes are due and removes once the bill is paid. If you don’t pay property taxes, the lien stays and your credit report can suffer serious damage. Also, if you want to sell your property, a tax lien clouds your title and can prevent your home from being sold until back taxes are paid.
Mechanics or Construction Liens
These liens typically arise from home renovations and are typically initiated by contractors, builders, material suppliers, surveyors, engineers, and architects. For example, you paid a contractor for work on landscaping or a home addition. If that contractor did not pay a supplier, the supplier may try to collect by putting a lien on your home. While this would probably result in a dispute between you and the contractor, the lien would remain as a cloud on your title until the issue was resolved.
Other Liens
If someone wins a lawsuit against you, they could become a creditor. If they can’t collect right away, they may have the right to file a judgment lien against property you own. The lien tries to ensure that damages will be paid at some point. A child support lien is imposed based on unpaid child support. Both of these types of liens require court approval.
Encumbered Property
A home with a lien is said to be “encumbered,” meaning the property has limitations that can prevent it from being transferred. This is a serious problem for anyone who wants to sell a home or buy a home that is burdened by liens. Buyers who find out a home has liens will question what other debts or problems are associated with the home. There are cases where property can be transferred without removing liens, however, the new owner needs to take on the existing burden of what is owed. And the new owner cannot get financing unless the liens are cleared. Also note that if the debt is large, for example with unpaid back taxes, the home could be confiscated and sold to pay off what is owed.
Because of the legal ramifications of liens, it’s best to consult a real estate attorney should you have a claim filed against your property.
Real Estate Term of the Week
Cloud on Title: Any document, claim, unreleased lien, or encumbrance that might invalidate or impair a title to real property or make the title doubtful. Clouds on the title are usually discovered during a title search.