How Do Property Liens Work?

The first in time, first in right rule establishes the priorities of liens recorded against your home.

When someone puts a lien on your property, your home becomes collateral for a debt. Some property liens, such as mortgage liens, are voluntary, which means you agree to the lien when you take out the loan. Other liens, like judgment liens, tax liens, and mechanic's liens, are called "involuntary liens" because the lienor doesn't need your consent before placing the lien.

A general rule in property law says that whichever lien is recorded first in the land records has higher priority over later-recorded liens. This rule is known as the "first in time, first in right" rule. As with almost every other rule, this rule has some exceptions. So, certain liens get priority over previously-recorded liens.

If more than one lien is recorded against a property, priority determines the lienholders' rights following a foreclosure sale.

What Is Lien Priority In the Context of Mortgages?

When purchasing a home, the borrower typically signs two significant documents: a promissory note and a mortgage (or a deed of trust). The promissory note is the personal promise to pay back the money borrowed. On the other hand, the mortgage or deed of trust establishes the lender's lien on the property and is recorded in the county records.

In a typical home purchase, the mortgage is recorded right away after the borrower signs it. So, based on the first in time, first in right rule, that mortgage has priority over all subsequently recorded (junior) mortgage liens, like second mortgages and home equity lines of credit (HELOCs).

Which Liens Get Priority Over Previously-Recorded Liens?

Depending on state and federal laws, certain liens, like those placed on a property for the collection of property taxes, special assessment taxes, homeowners' association (HOA) or condominium association (COA) assessments, and contractor fees, might have priority over first mortgages and other earlier-recorded liens.

Foreclosure and Lien Priorities

Lien priority matters because, in the event of a foreclosure, the holder of the lien with the highest priority is paid first from the proceeds of the foreclosure sale. Only after that party is made whole does the holder of the next highest priority receive any of the money from the foreclosure sale—and on and on down the line of liens.

If sufficient money isn't available for all of the lienholders to get paid, the holders of the liens lower down on the chain are out of luck.

Example of How Lien Priority Works in a Foreclosure

Here's an example to help illustrate the importance of lien priority.

Let's say you purchase a home for $500,000. You put no money down and take out two loans: a $400,000 first mortgage and a $100,000 second-mortgage loan. Later, you borrow $50,000 from a friend; your home also secures that loan. A few months later, a neighbor slips and falls on some ice on your property. The neighbor sues you and wins a judgment of $2,500. You refuse to pay, so the neighbor places a lien on your home to collect on the judgment.

The priority of the liens is as follows:

  1. $400,000 first mortgage
  2. $100,000 second mortgage
  3. $50,000 third mortgage
  4. $2,500 judgment.

Now, imagine that your home is worth only $425,000. You lose your job, and stop making your mortgage payments. Who gets paid if the bank that loaned you $400,000 forecloses, and the home sells for what it's worth at the foreclosure auction?

The first mortgage holder gets $400,000 from the foreclosure proceeds and is made whole. The second mortgage holder gets the remaining $25,000, even though it loaned you $100,000. Depending on the laws of your state, the second lienholder might be able to sue you to recover the remaining $75,000, which is called a "deficiency."

What about your friend and the neighbor? They won't get any money from the foreclosure, and their liens are now worthless. But they can still try to collect the debt from you in other ways. For example, your friend who loaned you money could potentially freeze your bank accounts, garnish your wages, or place a lien on other property you own.

Once a non-mortgage lien, such as a judgment 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.

Homestead Exemption

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.

The Priority of the Non-Mortgage Lien

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 priority over all liens recorded against the property.

The Cost of Foreclosing

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.

How Do Non-Mortgage Liens Affect Mortgage Liens?

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. Therefore, they have a lower priority than the mortgage liens. In a 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.

So, a lien's lower priority status might be enough of a deterrent to keep a holder of a non-mortgage lien from foreclosing. 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 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, 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.

Getting Help

If you have concerns or questions about any liens attached to your property, consider talking to a real estate attorney. Talk to a foreclosure attorney if you're facing a foreclosure and have questions.

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