What Is a Lien on a House, and How Does It Affect You?
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Published February 22, 2024 | Updated March 19, 2024
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If you took out a mortgage loan to purchase a house, you’ll have a lien on your property. It’s a part of the home-buying process, but not all homeowners know what it is or how it works.
So, what is a lien on a house? A lien gives the lender the legal right to your home if you default on your payments. In this guide, we’ll elaborate on what it means, the types of liens, whether they’re bad, and how they affect your credit score.
What Is a Lien and How Does It Work?
A lien on a house is a legal claim or right against a property. Liens are placed on homes so that lenders can collect what you owe to them if you default on the loan.
Having a lien on your home can limit what you can do with it. For example, it can be difficult to sell a home that has a lien on it if it isn’t removed first. A lien also gives lenders certain rights if you don’t fulfill your legal obligations.
For example, if you don’t repay your mortgage debt, the lender can legally start the foreclosure process and will have a claim over the proceeds of the sale.
What Types of Liens Can Be on a House?
So, what is a lien on a house, and what does it mean for you as a homeowner? There are several different types of liens that can exist against your home, each with separate nuances.
Mortgage Lien
When you get a mortgage or refinance it, a voluntary lien is placed on the property since it serves as collateral for the loan. This is known as a mortgage lien, which is the most common type of lien. It’s also expected and a normal part of the home-purchasing process.
If you default on your mortgage payments, the bank or mortgage lender can start the foreclosure process. When you have a mortgage lien, you can’t sell the property unless you pay off the outstanding loan or use the sale proceeds to clear your debt first.
Tax Lien
A tax lien is placed on a house by the IRS or your state if you fail to pay income or property taxes. These are involuntary liens and can have a negative impact on your credit score. Federal tax liens receive priority over most other liens.
Mechanic’s Lien
Another involuntary lien is a mechanic’s lien, which can be placed when you don’t pay a contractor for the work done on your home. A contractor can take legal action if you owe for unpaid work, and if they win, a lien can be placed on the property, although they’re relatively rare.
This means you won’t be able to sell your home until you pay off the lien. If you sell your home, you’ll need to use the sale proceeds to pay off the lien before you can get the money from the sale in your bank account.
“Make sure that you read the fine print for any contractor work being done to your home,” cautions Teresa Dodson, debt expert and founder of Greenbacks Consulting. “I would not work with a contractor that had this in their agreement if possible.”
Judgment Lien
If you have any unsecured debt, such as personal loans or credit card debt, the lender can file a lawsuit against you. However, whether a lender can do this this can vary by state. The court may award the creditor a judgment lien, which means they can force you to sell your home to pay off the money you owe.
How Does a Lien on a House Affect Your Credit Score?
Not all liens are reflected on your credit report. A consensual lien on a home, such as a mortgage lien, won’t impact your credit score unless you don’t make the payments. Experian, Equifax, and TransUnion, the three major credit reporting bureaus, no longer report tax liens.
Judgment liens and some mechanic’s liens can impact your credit score because they’re a result of defaulting on a loan and take into account your payment history.
Is It Bad To Have a Lien on Your House?
Now that you know what a lien on a house means, it’s also important to learn more about how it may impact you as a homeowner, buyer, or seller.
Impact on Homeowners
When a lien doesn’t have anything to do with your payment history, it doesn’t impact you. For example, a mortgage lien is voluntary, and it doesn’t impact you if you make mortgage payments regularly. Unless you’re paying for the home upfront with cash, a mortgage lien is necessary and a normal part of home buying.
If a lien is a result of unpaid debt, such as a judgment lien, it can be bad for you. The lender can foreclose the property or wait for you to sell the property so they can recover what they owe.
Impact on Buyers and Sellers
If you’re selling a property with a lien on it, there can be closing delays. A property title search is performed during the selling process to ensure your property is clear. If there is a lien on the property, you won’t be able to sell the property until you settle the lien.
As a buyer, it’s important to ensure that the title search doesn’t reveal any unpaid liens. Typically, you won’t be responsible for paying the liens on a property that you’re buying. You may be on the hook in some cases, such as if you’re buying in an auction that requires you to clear them.
How Can I Remove a Lien?
Removing a lien on a property can be complex and time-consuming, especially when it is due to a judgment. Here are a few different options to explore:
- The easiest and most straightforward way to remove a lien is by paying off your debt in full. Once you do, you can file a Release of Lien form to remove the lien.
- If a lender obtained a lien through illegal means or bad faith, you can obtain a court order to remove it.
- You can negotiate with the lender to settle the debt you owe. Consider debt mediation or arbitration.
- You can also wait for the statute of limitation to pass. After this time, the lien won’t be valid and can be removed.
- You can file for Chapter 7 bankruptcy. While you may not be able to keep the collateral, an experienced bankruptcy attorney can develop a strategy to retain assets that are important to you.
Selling a House With a Lien
Selling a house with a lien on it can be complicated. You can only sell a house that has a clear title. While it’s still possible to sell your home, it’s important to understand how it works.
When selling a house, you’ll need to check the title to see if there are any liens against it. If there’s a lien, you’ll need to clear it before you sell. You can remove the lien by paying off the debt, settling your debt with the lender, or through one of the options we’ve listed above.
Since liens can be complex, we recommend working with an experienced lawyer and real estate agent. They can walk you through the process and ensure that the sale goes smoothly.
Good Liens vs Bad Liens: Know the Difference
Is it bad to have a lien on a house? Not always. Residential mortgages are consensual liens, and while they’re visible on your credit report, they won’t have a negative impact unless you don’t make payments as agreed.
Involuntary liens due to court judgments and non-payments are bad liens because they are a result of non-payment of debts. These liens are considered derogatory and can negatively impact your credit score.