What Is a Lien and How Does It Work?

A lien is a legal claim on property that allows the creditor to take possession of it if the owner doesn't pay their debt. Liens are commonly placed on real estate properties when buyers get a mortgage. They are also placed against vehicles, machinery and equipment, financial accounts, business assets, and legal judgments. Think of a lien as a way for the lender to ensure debts get paid.

How does a lien work?

When a buyer purchases a home or other asset using a loan, a lien is placed on that property. It gives creditors the right to take legal action to recover their debt.

The property serves as collateral. The lien itself is not a legal agreement but a legal claim granted by an underlying legal agreement, such as a mortgage contract. If the property owner does not pay against the loan according to the loan agreement, the lender can take legal steps to seize and liquidate the property to collect the money owed.

How to find a lien on a property?

If you have a mortgage on your home, there will be a lien on it. Read through your closing documents to understand the terms of your mortgage agreement. There are several ways to identify liens.

Local government records

Loan closings require a legal step to file a lien with the county where the property resides. County land or property records offices maintain this information. If you know what you are looking for and have some time to spare, you can search local government records. You can do this in person, by submitting a request by mail, or, in some cases, online.

Title search company

An easier but more costly alternative is to use a title search company. These companies will find out about any liens you have on your behalf, saving you the hassle of looking yourself and worrying that maybe you missed something.

Credit reports

Certain liens might be reported to credit bureaus and appear in the public records section of your credit reports, which you can easily access.

Types of liens

Mortgage lien

A mortgage lien is a claim right that a lender has on a real estate property when the homebuyer takes out a mortgage loan. It establishes the lender’s right to seize and sell the property if the homebuyer doesn’t repay the loan according to the agreement terms.

Tax lien

When an individual or business fails to pay their federal, state, or local taxes, the government can place a lien on their properties, including real estate, vehicles, and financial accounts. The property owner cannot sell or refinance the properties without first addressing the tax debt. These liens ensure the government can collect what it’s owed before other creditors during an asset liquidation event.

HOA lien

Property owners in a community maintained and regulated by a homeowners association (HOA) may have a lien filed against their property if dues payments become delinquent. Failure to pay HOA dues can lead to a legal process that may end in property seizure or foreclosure. HOA legal authority varies by state and local jurisdictions.

Judgment lien

If someone loses a lawsuit and can't pay what they owe, the winner can place a judgment lien on their house or other properties to ensure they get paid if the debtor’s assets are sold. The creditor may have the right to force a property sale or seize and sell it to satisfy the judgment lien.

Mechanic's lien

A mechanic's lien is a legal claim that contractors or building suppliers can place on a new or renovated property. It's a safeguard for contractors to ensure they’re paid for completed services.

What is a lien on a house?

A lien on a house is usually a mortgage lien, which gives the lender a legal claim to recover the property if the property owner does not abide by the mortgage terms. However, creditors can place involuntary liens on a house when the owner owes money for judgments or taxes.

What happens when you have a lien on your house?

Nothing happens if there is a mortgage lien on your house unless you fail to pay the mortgage according to the mortgage agreement. A lien is simply a legal claim to protect lenders.

If another type of lien is on your house, such as a tax or judgment lien, you may face hurdles if you wish to sell or refinance it. The creditor may also seize the property and sell it to recover what is owed.

How to remove a lien

Property owners can pay off the loan on the property to remove a lien. This can be done by either paying off the loan with cash or another loan or selling the property and using the proceeds to satisfy the original loan. Upon payoff, the lien holder will file a release in the county office where the lien was recorded.

Liens can also be removed by successfully contesting them in court. If a lien isn’t valid and you can prove it, a judge can make it go away.

How much does it cost to remove a lien on property?

The cost to remove a lien depends on the type of lien and where it was filed. At a minimum, you’ll need to pay back the money owed on the loan or fine. In some cases, recording or legal fees may also be applied.

Types of loans that require liens

• Auto loans.
• Mortgage loans.
• Business loans.
• Equipment loans.
• Collateralized personal loans.
• Car title loans.

Types of loans that don’t require liens

• Credit cards.
• Student loans.
• Unsecured personal loans.
• Personal lines of credit.
• Payday loans.
• Unsecured medical loans.

How do creditors collect liens?

When a creditor believes they are owed money, they may first contact the debtor to inform them they are late and attempt to rectify the payment issues amicably. If that doesn't work, they will seek a court judgment and file a lien with the appropriate government office. After that, the creditor sends a formal notice to the debtor, informing them of the legal maneuver to collect what is owed.

The jurisdiction will have a waiting period when the two parties can attempt to negotiate repayment terms. However, once the waiting period is over, the creditor can move to enforce the lien through foreclosure, seizing and selling the asset, or obtaining a court order to garnish wages.

After the debt is fully satisfied, the creditor must return any surplus and file paperwork to release the lien in the same jurisdiction where the lien was filed.

Which action can be taken if you don't pay a lien against your property?

The consequences of not paying vary depending on the property’s location. The type of property and amount owed can also influence the action taken.

Creditors can foreclose on a property to force a sale or seize and sell the property to recover the loan amount. They may also begin legal proceedings to obtain a judgment to help facilitate collection, which may involve wage garnishment or seizure of other assets not associated with the loan.

Once the debt is paid, the creditor must return any overages to the borrower. The borrower can expect creditors to send negative reports to credit bureaus, making it difficult to obtain future financing.

Does a lien affect your credit score?

Yes. Liens can impact your credit score positively or negatively.

A mortgage lien is generally positive for your credit score if you pay on time each month. Lenders report monthly payment activity, which provides transparency for other future lenders. If you honor your repayment schedule, your credit score will be boosted. If you don’t, your reputation as a borrower will take a hit.

Other types of liens, like mechanic and judgment liens, may also appear on your credit reports, affecting them negatively. Tax liens do not affect your credit score.

TIME Stamp: Liens help creditors recover debts

It’s important for anyone involved in borrowing or lending to understand how liens work. They establish legal mechanisms for creditors to recover debts, often through measures like asset seizure, foreclosure, or court-ordered repayments.

Liens become relevant when borrowers face financial difficulties due to overborrowing, irresponsible spending, or misconduct. Managing borrowed money requires borrowers to stay informed and diligent about their financial obligations to avoid financial distress and proactively address any potential issues before creditors take action to recover what is owed.

Frequently asked questions (FAQs)

How long does it take to remove a lien from a property?

The time varies based on the type of lien and circumstances. Paying off the debt is the most reliable method. The lender must file a lien release with the government agency where it was filed. Processing times vary, and enforcing liens can take longer, depending on the agreement and case complexity.

Can you sell a property with a lien?

Yes. Sellers with current mortgages and voluntary liens can sell properties without issue. However, homes with involuntary liens (e.g., for unpaid taxes or HOA delinquency) can be harder to sell. Sellers must disclose property liens to potential buyers. And sale proceeds must first be used to satisfy the lien, with only surplus funds rebeing routed to the seller.

Can you refinance your house if you have a lien on it?

Generally, yes. However, some instances may be more challenging than standard mortgage liens. Refinancing a house that has a mortgage and line of credit will usually cancel the line of credit, which must be paid off. Involuntary liens that become active after the original mortgage is put in place will be viewed as a credit risk by new lenders.