Homebuyers are often warned to check for liens on a property before making an offer. What is a lien on a house? Are there different kinds of liens? Why would a lien be an issue? Here’s what you need to know to protect yourself and your home purchase.
What Is a Lien on a House?
As Nolo explains, a property lien is a legal notice attached to a specific piece of property. It signals that a creditor is stating that they have a legal claim against the property because the property’s owner owes them money. Notably, the lien is attached to the property instead of the person.
Voluntary Liens vs. Involuntary Liens
Some liens are nothing to worry about. Others are red flags warning of potential problems ahead. The determining factor is whether they are voluntary or involuntary.
As Investopedia reports, a voluntary lien is one to which the property owner willingly agrees. These are often used to secure financing. For example, banks automatically take out a voluntary lien when they provide a mortgage. Voluntary liens are simply a normal part of doing business, so uncovering one is no cause for concern. Involuntary liens are different. As the name suggests, involuntary liens are liens imposed on a homeowner by a creditor who makes a legal claim that they are owed money. This type of lien suggests that the property owner isn’t meeting all of their financial obligations.
Types of Property Liens
What is a lien on a house used for? Creditors generally place involuntary liens in order to get payment from the property’s owner. As Own Up indicates, there are several types of involuntary property liens:
- Federal Tax Liens: The IRS will place this type of lien to recover unpaid tax money.
- Property Tax Liens: A county or jurisdiction can assess a lien for unpaid property taxes.
- Child Support Liens: Failure to pay child support can lead to a lien against the delinquent parent’s home.
- Judgement Liens: A court judgement in favor of a creditor may result in a judgement lien.
- Foreclosure Liens: When missed mortgage payments become a problem, a lender may request a foreclosure lien.
- Municipal Liens: If a municipality is forced to complete work that a property owner refuses to do in order to bring a property into compliance with government ordinances, officials may use a municipal lien to get reimbursed.
- Mechanic’s Liens: Contractors who are unable to collect the fee owed for their services may place a mechanic’s lien.
The Problem with Liens
Involuntary liens can present a problem for both the seller and anyone hoping to buy it. Because these liens signify an unpaid debt, they can create credit hassles for the property’s owner. They also tend to make selling a property more difficult. As MillionAcres points out, experts warn homebuyers to avoid purchasing a property with existing liens because the liens are attached to the property. Buying a home with unsatisfied liens against it means that those debts become yours. In many cases, a seller must either clear the liens or make arrangements to pay them off at closing with the proceeds of the sale before the home sale can go through.
Protecting Yourself from Property Lien Problems
Fortunately, there are things that homebuyers can do to protect themselves. The first is purchase title insurance. Title insurance policies protect the interests of either the lender or the new homeowner if a problem like a lien is revealed after the sale is completed. A lender’s title insurance policy is generally required, but title insurance is often optional for property owners. If you have any concerns about property liens, purchasing title insurance can bring peace of mind. In addition, you can check to see if there are any liens against a property that you’re interested in purchasing. As BiggerPockets suggests, you can either contact a title company and request a search or you can reach out to the county recorder’s, clerk’s, or assessor’s office and conduct your own search.
At PrimeLending Twin Cities, we understand that dream homes come in all shapes and sizes. We would be happy to help you explore your options and find the right loan product. Contact us today to learn more.