You likely understand that different types of liens in real estate involve a legal claim on your property. Filed with a county records office or state agency, a lien allows the individual or entity holding the lien rights to obtain access to the property if the debts aren’t paid. Liens help creditors collect money owed to them by “clouding” the title of a property.
But did you know that there are many different types of property liens? And that, depending on the circumstances, various types of liens can potentially require a unique solution, critical to the effective removal of a lien on your property?
In this article, we are going to investigate the meaning of a lien, various types of property liens, and what kind of options are available when releasing a lien on a property. We’ll shed specific light on the process of ‘How to Sell a House with a Lien on it in 4 Easy Steps!’ Whether you’re looking to sell your house fast or just looking for facts and information regarding a “lien on my house,” then you have found the most transparent and comprehensive guide available online. We’ll explain all of the lien rights you have as a property owner subject to levy and lien.
Key Points
- Real estate liens are legal claims against the property by an individual, entities, or creditors that compel them to collect what they’re owed.
- Types of liens in real estate have six umbrella types/categories. Additionally, there are six involuntary lien types/categories.
- If a homeowner doesn’t settle an obligation, then the lienholder may legally seize and dispose of the property.
- Tax liens are no longer reportable, but other involuntary liens may impact your credit score.
- Homeowners can remove a lien on a property by making payment arrangements, settling debts, as well as other methods explained in this article.
What is a Lien? (General Definition)
In layman’s terms, a lien is a legal claim on something you own as a security against a debt you owe. The word “lien” is derived from an old French word for “band” or “tie.” You can trace its roots all the way back to ligare, a Latin phrase meaning “to bind.”
While understanding this historical etymology isn’t essential to understanding how liens work, it’s helpful because the primary purpose of a lien is to bind a debtor to a lender until a loan is paid off.
Lien’s limit what the owner can do with an asset, as creditors are given a stake in the property to compensate for what is owed to them. Liens give creditors certain legal rights, especially when a debtor hasn’t paid or has improperly fulfilled their contractual financial obligation.
Types of Liens in Real Estate
Broadly speaking, there are many different types of liens that can be applied in numerous different situations. As a homeowner facing the legal challenges of a real estate lien, it’s important to understand these different varieties of liens. There are pros and cons to each that may come into play based on your unique circumstances.
Types of Liens (Six Umbrella Categories)
Generally speaking, the most common types of property liens can largely be divided into six major categories:
- Voluntary lien/Mortgage (consensual)
- Involuntary lien/Statutory lien/Non-mortgage (non-consensual)
- General lien real estate
- Specific lien
- Perfected Lien
- Unperfected Lien
What is a Voluntary Lien?
There are two types of voluntary liens. The first type happens when a person voluntarily takes out the terms stated in a house sale contract (or the mortgage deed of trust and the note), known as a Purchase-Money Security Lien. Generally, when people talk about voluntary liens, they’re talking about mortgages. A borrower gets money from a lender in a mortgage situation and the lender gets a “note” and a “lien on the house,” which serves as collateral for the debt. If the borrower can’t pay the money back properly, then the lender typically assumes ownership of the house in “foreclosure.”
The second type of voluntary lien is known as a Non-Purchase-Money Security Lien. This is the opposite of a Purchase-Money Security Lien. The debtor/homeowner already owns the property and they use it as security for borrowing. Examples include borrowing against home equity through a second mortgage or refinancing a mortgage.
What is an Involuntary Lien?
Involuntary liens are liens placed on a property by others (besides mortgage lenders) for unpaid obligations. When people talk about involuntary liens, they’re usually referring to the most common type, tax liens. How about an example? If you own a house and don’t pay your property taxes for several years, the local county can place a state tax lien on your property. This is their way of telling you, “pay up!” If you don’t pay up, they can proceed with foreclosure.
What is a Specific Lien?
What is a General Lien?
A general lien is the opposite of a specific lien. General liens are a lien on all property. This applies to both the real estate property and personal property an individual owns, not just one specific real estate property (like in the case of a foreclosure).
For example, a general lien can root from an IRS tax lien pursuant to income taxes owed by a taxpayer to the federal government. Specifically, if a person owes income taxes to the IRS, it would be classified as a general lien against all real estate property and personal property of the delinquent taxpayer. This would result in a lien over property, as well as bank accounts, vehicles, and other assets owned by the taxpayer.
How to Release a Lien on a House in 4 Easy Steps!
Fortunately, there are several different ways to go about the removal of a lien on a property. We have put together an easy-to-understand, 4-step guide that will help point you in the right direction.
1. Pay Off the Lien on Your House
Regarding involuntary liens, one way of releasing a lien on a property is to pay off the lien. However, depending on your financial situation, this sometimes is not always possible. Even if it is possible, it would be wise to challenge the pay-off amount through settlement process negotiations.
A property owner may be able to negotiate with the creditor, entity, or individual holding the lien rights to the lien on your house. Negotiations should involve an experienced attorney or CPA to settle the lien. This could result in a reduced amount owed to the lien on your house or it could result in a hybrid solution if you own other real estate properties that could allow the real estate lien to be transferred.
The success of the settlement negotiations depends on the type of lien, the relationship between the debtor and the lienholder, and the value of the lien. In some situations, a lienholder may agree to remove the lien if both parties can agree to a payment plan.
Ultimately, the most straightforward way to remove a lien on property for money owed is to satisfy the debt. Once you have paid it off, you can file a Release of Lien form, which acts as evidence that the debt has been satisfied.
2. Transfer the Levy and Lien on Your House
Remember that a lien over property is tied to the house, not to the property owner. Because of this fact, a homeowner can be free of a lien on a house when they transfer or sell the asset to which the lien is bound. In some situations, circumstances can warrant the transfer of the real estate lien to another property you own. You may also have the option to facilitate a transfer of title to a relative that is better able to deal with the legal challenges of a lien against property. An attorney should always be involved in these negotiations. If successful, transferring the levy and lien will allow you to defer paying off the lien. It will also clear the title on the home, providing you with the leverage necessary to potentially sell the property with less hassle. Additionally, this option provides you with a potential option to refinance the property for extra cash.
3. Dispute the Lien (File a Lawsuit)
If you have evidence that the lien placed on your property is invalid, you may have the legal leverage to effectively contest the lien by filing a lawsuit against the lienholder. If the court determines that the lien is invalid, the lien will be removed from your property and your title will be cleared.
Keep in mind, this would be a last chance option. It should only be pursued after directly negotiating the legitimacy of the levy and lien with the creditor, entity, or individual holding lien rights to the lien on your house have failed. If you believe that the real estate lien is legally invalid and have competent evidence in support of that belief, this may be the best course of action.
4. Sell Your House
The law does not require that a lien on a house be removed before the property can be sold or transferred. However, the removal of a lien on the property must be executed if the buyer needs financing or wants to clear the title. If the title is transferred without the lien being paid off, it remains on the property.
In situations like this, where a homeowner with a real estate lien on a property needs to sell, a traditional retail home buyer would generally not be adequately equipped nor interested in purchasing a homebound by levy and lien. This is where a non-conventional cash home buyer could potentially be the best option to sell your house fast for cash.
For example, if you have sufficient equity in your home, you can facilitate the removal of a lien on the property at closing by paying off the lien with profits from the home sale. For instance, let’s say you sell your house for $500,000 with a $300,000 mortgage and an $80,000 state tax lien. You will profit $120,000 and pay off the remaining mortgage and tax lien at closing, minus the remaining home seller costs and agent fees.
Even if you are lacking equity in your home, an additional option would be to bring cash to closing. For example, your house sells for $500,000 with an outstanding mortgage of $485,000 and a $25,000 lien on the property. You will owe $10,000 towards the remainder of the lien, as well as home sale closing costs and agent fees.
The Bottom Line
All homeowners have liens on their homes until they pay off their mortgage. While these liens don’t have negative consequences because they’re voluntary, involuntary liens can damage your finances and your credit score, as well as create long-drawn-out legal battles.
If you fail to fulfill your financial obligations, the government and other creditors can take out a tax lien, judgment lien, or mechanic’s lien to compel you to pay off your debts. If you still fail to pay them, then they can enforce the lien, foreclose or seize the asset, and pay off the debt for you.
About Justin Mitchell
Justin is a cash house buyer, with real world experience at finding solutions for people that are in the market to sell their house or investment property quickly for any reason.
Justin has experience with all types of buying and selling scenarios and understands how to make every transaction simple and stress-free. Additionally, he researches and writes real estate related content for various real estate related websites.
