The expression ‘ignorance is bliss’ won’t serve you well when it comes to unpaid balances and liens on a property. Undiscovered liens can result in high fines and even foreclosure on the home you worked so hard to obtain. Creditors should make all possible attempts to notify property owners of liens placed on their property but some liens can still go unnoticed so homeowners must take steps to protect themselves.
There are some cases where a homeowner only ends up finding out about a lien when they go to refinance or sell their house, along with many other scenarios where liens come to light. Below is a breakdown of what homeowners need to know about lien placement in order to protect their investment against one of the biggest risks of homeownership.
Understanding the Difference Between Voluntary and Involuntary Liens
All liens signify a debt is owed but it’s important to note that not all liens are negative, and at times, are expected. A property owner can choose to place a lien on their property. A voluntary lien is a claim over the property that a homeowner agrees to give to a creditor as security for the payment of a debt.
A mortgage lien is the most common type of voluntary real estate lien, also called a deed of trust lien in some states. Anyone who has financed their home with a mortgage loan would automatically have this type of lien applied to their property. Only about 37% of homeowners are mortgage-free so that makes the remaining 63% of homes with mortgage liens applied.
Certain states use what is called a deed of trust which adds an additional party, a trustee, who holds the home’s title until the loan is repaid. As long as the homeowner regularly pays their mortgage on time, the lien will be removed after all terms of the loan have been satisfied, the debt is paid in full, and the mortgage release has been properly recorded.
Generally, homeowners don’t encounter any issues with voluntary liens as they typically know about them ahead of time.
On the contrary, an involuntary lien can be placed on a property regardless of whether the owner wants it on their property. In other words, an owner’s property can be claimed against their will if payments aren’t made in a specified time period. These types of liens are more dangerous because borrowers can be unaware that the liens have been placed against them.
How are Homeowners Notified of Liens?
Common notification methods include sending multiple unpaid bills in the mail but these bills can be lost or not reach the appropriate person before a lien is placed. They can also arrive when the previous homeowner was at the property but cease by the time a new homeowner moves in. This is a more common issue for secondary or investment properties where the property address is different from the mailing address.
A Lis Penden, meaning pending suit notice, is typically recorded in the real property records as a more official notice of lien. But just because it is recorded does not mean that homeowners are actively checking to stay up to date on their debts.
Understanding the debts that homeowners are responsible for and paying the debts on time is key to avoiding involuntary liens.
Who can file an involuntary lien?
Any party that homeowners are obligated to abide by for payment can file an involuntary lien against the property. These include but are not limited to:
- Property Tax Collectors
- Utility Departments (i.e. code, permit, sewer, and water)
A lien won’t form until the creditor takes further action.
A contractor who is providing materials or services to a property can place a construction lien, commonly known as a mechanic’s lien, on a home to make sure they receive their owed money until they are paid. In most states, a contractor has anywhere from 90 days to 6 months to file a lien against a property for unpaid work.
There are diverse rules among states (and even local governments) and some have very specific requirements for how notice must be provided to the property owner and how the lien must be recorded. Any misstep may invalidate the lien. A Notice of Intent to Lien (NOI) may be required to be sent to homeowners who are at risk of a lien being placed on their home. This acts as a warning for property owners in states such as:
- North Dakota
While certain notification regulations are set in place regarding the placement of liens, a contractor can sometimes not properly remove the lien or even forget to. A municipality rarely issues any notice to the homeowner when the contractor fails to do this. The most drastic method of removing this type of lien from your property is to take it to court. If the court rules in the homeowner’s favor, the lien can be ordered to be stricken from the property record. It’s recommended to get a lien waiver signed by the contractors to prevent legal action.
Property Tax Liens
Additionally, property tax liens are common involuntary liens. In this case, the municipal government has the right to place a lien on properties within their jurisdiction to secure their interest in the property when tax debt goes unpaid. A homeowner cannot refinance or sell without satisfying their tax debt. After a certain period of time, the tax collector’s office will auction off a tax lien as a tax certificate or deed on the property which allows a third party to pay off the debt, and in return, they can earn interest or even ownership to the property.
Oftentimes, additional taxing authorities are missed because homeowners assume that paying the county tax bill in full accounts for all owed property taxes. This is not the case for several states where taxes are collected by multiple authorities. These authorities include:
- City Taxes
- Utility District Taxes
- School Taxes (Mostly applicable in Texas)
Even if the county tax bill has been paid in full, a lien can still apply to a property for the other missed tax bills.
A public record search can uncover if a property has an involuntary lien in most cases but unfortunately, not all liens are recorded and some involuntary liens may not show up during a normal title search. For example, there may be months of unpaid utility bills that have yet to be recorded due to a backlog at the municipality.
A municipal lien search may be required to uncover these types of liens. Some states and municipalities are better than others with how much information they provide online to the public. Additional examples of unrecorded liens include:
- Special assessments (don’t always appear in the ad valorem taxes on a property)
- Code violations
- Building Permits
A lien has been found on a property – now what?
There are many questions homeowners may ask when it comes to discovering liens. The first question that normally comes to mind is, “How do I get a lien removed?” The simplest way to remove a lien is to pay the creditor the balance you owe and oftentimes fill out a release-of-lien form to formally remove the lien. If there are several liens placed on the property, liens will need to be paid in a particular order based on priority.
Understanding Lien Priority
States have different laws relative to determining priority in real estate liens. Normally, lien priority is determined by a lien’s recording date, also referred to as “first in time, first in right.” The first lien takes priority over the second lien, and so forth. Although there are some exceptions to this rule. For example, super liens have automatic higher priority. These include
- Property tax liens
- Special assessment tax liens
- HOA liens
- Mechanic’s Lien
Junior liens are generally lower in priority. These types of liens include:
- Judgment liens
- Second mortgage
For example, a married couple purchased a home for $350,000 with a mortgage of $300,000 which by default applies a lien on the property until the mortgage is paid off. They later decide to build a detached garage with a second mortgage. The original mortgage must be paid off first before the second mortgage lien can be removed.
It is rare that a lien would have priority over a first mortgage loan assuming that the lender did not have notice of any other liens, such as mechanic’s liens, on the property at the time of signing.
- Involuntary liens have more potential to negatively impact homeowners
- Creditors have the right to place a lien on any property as an attempt to settle a debt until payment requirements are met
- Homeowners should be aware of and pay all debts on time to avoid liens being placed without them knowing
- Not all liens are recorded and may require a municipal lien search to uncover
Liens don’t have to be a downer to the excitement of homeownership but it’s wise to be aware of who has a financial interest in your home. If you’re worried about a lien being placed against your property without your knowledge, request a title search and municipal lien search through a licensed title professional that can help catch liens in unexpected places. Additionally, performing a public record search will help clear up issues that impact your decisions when selling or buying a home.