What does it mean if there is a property lien on a home you want to buy? Learn more about liens and what your options are.
There are few things more exciting than closing on a new home. Until you discover that there’s a lien on the title and everything comes to a screeching halt. A property lien can be a serious issue or a small inconvenience depending on why it was put on a home. However, no matter how small the issue is, any lien is enough to stop a home sale in its tracks.
So what is a lien? And what are your options if you find a house you love only to discover that the title has a lien on it? Learn more about what a lien means for your home purchase and exactly what to do about it.
1. What is a property lien?
A lien is a legal claim that is put on a property due to outstanding debt. A lien can be put on a home for many reasons, including a contractor claiming they weren’t paid for work they did on the property, the homeowner not paying their property taxes, delinquent mortgage payments, and owing child support. If the conditions of the lien aren’t resolved (usually paying the debt), the lien holder can begin the process of seizing the property to sell it and recoup the money they’re owed.
One thing to note is that not all liens are bad. When you take out any mortgage, you let the bank take a voluntary lien on your home, meaning if you stop paying your mortgage, you agree that they can foreclose on your property.
2. Can I still get a home loan?
Lending institutions will not approve a loan on a home with a lien, no matter how trivial the debt is. There are several reasons for this:
- If you unknowingly acquire a lien, the interest and penalties from the debt can pile up and turn a small problem into a much bigger one.
- If the government puts a tax lien on a home, they get priority over the mortgage lender when it becomes time to collect. So, a tax collector can foreclose on the home and seize it before the bank does.
- Banks can’t force you to pay the balance of your mortgage if someone whose lien takes precedence forecloses on your home, so they would have to take you to court.
3. Why am I learning about the lien so late in the process?
When the title company pulls the property title for the closing, any outstanding liens will surface. Although there are rare instances where an unscrupulous seller will try to get one over on you and sell you a property they know has a lien on it, usually homeowners don’t even know they have a lien on the home until the title is pulled.
Most likely, the homeowner may have miscalculated their taxes or didn’t know that a dispute with a contractor or mechanic resulted in them putting a lien on their home. They usually aren’t alerted to this fact until someone comes to collect on the debt or the title is pulled for a sale or refinancing.
4. How can the property lien be resolved?
There are two simple ways that the lien can be resolved. The seller can pay off the lien and have it cleared. Another scenario is that it’s an erroneous lien and they simply need to have it resolved. Even if the lien is a mistake, a lender will not approve a loan until it’s resolved.
The other option is you can agree to pay the lien in exchange for a lower home price or even as a bargaining chip on a highly sought-after home. Be very careful if you choose to go this route. Your mortgage lender will have no involvement and will not allow you to add the lien to your mortgage or issue a private loan for it. Another risk is that the seller isn’t required to sell you the home after you pay the lien. Make sure you work with a real estate lawyer to ensure you cover all your bases.
5. What happens if a lien is never resolved?
Most liens are for delinquent property taxes or failure to pay contractors on home-related contracts. But liens can also be put on a home for just about any financial reason. They can and are frequently put on a home due to a court judgment involving a creditor, non-payment of child support, and non-payment of any kind of taxes at any level—up to and including the federal level.
Usually, a contractor or a creditor won’t be able to foreclose on your home if they put a lien on it—they’ll simply wait until the home is sold or refinanced to collect. However, when the IRS puts a lien on a home, they’re serious. The homeowner will have a period of time to pay up. If they don’t, the government will seize the home and sell it to get the back taxes they’re owed. From there, the remaining money goes to any other lien-holding tax departments, then to the mortgage lender. If there’s any money left over after that, it goes to all other persons or legal entities that may hold a lien on the house. Finally, any remaining money will go to the former title holder (homeowner).
6. Once the property lien is resolved, what happens?
Once the lien is resolved, you still have some leverage. If the seller had to delay the closing to take care of it, they set your timeline back. You may have even found other homes that you’re interested in in the meantime. It’s within your right to seriously consider withdrawing your offer completely or putting in a new one and renegotiating. Here, it’s critical to work with your real estate agent to ensure you approach this situation the right way.
If the sale is delayed, it’s always good to look at a few other homes to ensure you have a back-up plan while you wait for the seller to work out the lien. But if the lien is resolved in a timely manner and you both come to an agreement on the price, your sale can move forward with the closing as planned.