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. You then decide to do some repairs on the home and borrow $50,000 from a friend; your home also secures that loan. During construction, a neighbor slips and falls on some wet cement 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 while you're still upgrading your home, which is now gutted and 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 freeze your bank accounts, garnish your wages, or place a lien on other property you 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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