A "lien" is a creditor's legal claim against property, like a home, that a debtor owns. The home serves as security for a debt. The two types of liens are voluntary and involuntary.
The first type, "voluntary liens," are liens the homeowner agrees to, such as mortgages and home equity loans. The second type of lien, called "involuntary liens," includes non-mortgage liens placed on the home without the homeowner's consent.
Read on to find out how non-mortgage liens are enforced.
Involuntary liens include:
Once a non-mortgage lien is placed on your home, the lien holder can choose to take one of two routes. The lienholder can simply sit back and wait for the day you decide to sell or refinance your home. No buyer will want to purchase your home, nor will any lender refinance your mortgage, with the lien still attached. At that time, you'll be forced to pay off the holder of the non-mortgage lien to have the lien removed.
The holder of the non-mortgage lien may also enforce its lien by foreclosing, although this tactic is less common. The process of foreclosing on a non-mortgage lien is governed by state law and varies depending on the type of lien being foreclosed. For example, property tax liens may sometimes be foreclosed outside of court, while the holder of a mechanics' liens must typically sue the homeowner in court to foreclose.
The foreclosure of non-mortgage liens is less common than the foreclosure of mortgage liens due to several factors.
One factor is the homestead exemption, which exempts a certain portion of the value of a debtor's primary residence from liability to certain creditors. (Depending on the state, the homestead exemption might not apply to mortgage liens, mechanics' liens, and property tax liens.)
The homestead exemption amount varies from state to state—from zero in some states to an unlimited amount in others.
Another factor is the priority of the non-mortgage lien. Many homeowners have one or more mortgage liens recorded against their property, and these mortgage liens typically have priority over subsequently recorded non-mortgage liens. (This rule has some exceptions. For example, some property tax liens have super-priority over all liens recorded against the property.)
A third reason non-mortgage liens are rarely foreclosed is the cost of foreclosing. If the non-mortgage lien is foreclosed through court, the party doing the foreclosing must pay all of the substantial costs of the typical lawsuit.
Even if the non-mortgage lien is foreclosed outside of court, costs are still involved, such as the cost of publishing notice of the foreclosure sale in a newspaper and payment to the sheriff or other official administering the foreclosure auction.
Non-mortgage liens typically have little impact on mortgage liens. Most non-mortgage liens are recorded after mortgage liens (because lenders will not loan money if a judgment, tax, or mechanics' lien is recorded against the property) and therefore have a lower priority than the mortgage liens. In any foreclosure sale, the mortgage liens will be paid first out of the proceeds, and the remaining proceeds will be paid to the non-mortgage liens in order of priority. As described above, this alone might be enough of a deterrent to keep a holder of a non-mortgage lien from foreclosing, as the home might not have enough equity remaining to cover the lower priority liens once the mortgage is paid off.
One exception touched upon above relates to property tax liens. In a number of states, property tax liens will take priority over all other liens, including mortgage liens, regardless of when the lien was recorded. Because of the super-priority of property tax liens, many mortgages give the lender the right to collect property taxes from the borrower or foreclose if the homeowner fails to pay property taxes. In the event of a property tax lien foreclosure, a mortgage lender will often pay the delinquent property taxes, roll that amount into the outstanding mortgage debt, and foreclose on its own.
If you're facing a foreclosure and have questions about whether the foreclosure will extinguish a non-mortgage lien or another type of liens on your home—or if you have questions about how the foreclosure process works—consider talking to a local foreclosure attorney.