Liens 101 – Types of Liens
You can think of your home mortgage as a lien on your house, often called a voluntary lien. You can also think of it as collateral. It’s a legal right against a property that allows the lienholder to take control of it or take legal action to settle a debt. Until the loan is paid off or settled, the bank lender is the lienholder in most situations.
If you agree to a lien (in writing), that is called a consensual lien.
Some other types of liens:
- Tax lien: a lien placed on your property due to money you may owe for income, business or property taxes.
- General judgment lien: allowing your creditor to sue you for the amount you owe, or they can take your property in order to satisfy the judgment.
- Mechanic’s lien: also known as a property or construction lien, when builders or contractors are not paid for their work.
How you remove the lien on your property:
- Pay off the debt. Once you do, the lien is removed.
Other ways a lien can affect your situation:
- If you stop making payments on your mortgage, the lienholder (usually the bank) holds the title until the property can be sold to someone else.
When you have an outstanding mortgage or other type of lien on your property, it may become difficult to obtain financing. However, there are options. Here are just a few:
- Rent to own: also called lease-to-buy: in this situation, you rent the home until you pay an agreed-upon amount, and then you become an owner when the deed is transferred to you. This is a tricky option. Be sure there are no liens on the house that may be passed to you when you become an owner. You can go to the local public records office to research this. You should insist that all liens on the property are paid before you take over, and confirmed in writing.
- Installment land contracts: you agree to directly pay the seller the purchase price plus interest in installments over a set period of time. However, the seller retains legal right to the property until you pay the full purchase price. In this case, then, the seller — not the bank — continues to own the property while you pay installments. You obtain the deed (and ownership) when the final payment is made. However, be sure that all liens on the property are paid by the seller before you take ownership. Otherwise, those lien responsibilities are yours.
- Wrap-around mortgages: this is a new loan that “wraps around” the old loan, usually because the seller was not able to pay off the original loan. So think of it as the balance of the original loan plus the amount to cover the purchase of the property. Be very clear as to how much of the money owed is due to liens, mortgage or otherwise, and be sure that the amount borrowed covers the cost of paying off all outstanding liens.
Not all liens are bad; for instance, a mortgage is a voluntary lien. However, no matter what the lien, it is in your best interest to completely fulfill your financial obligations. Otherwise, legal action may be taken to get you to pay up. If you don’t, the result could be foreclosure on your property, which is meant to pay off the debt you were unable to pay.