A house is the biggest purchase most people will make in their lives. The average net worth of a homeowner is $231,400, and most people have most of their net worth tied up in their home. This is why when people don’t pay large bills, creditors are likely to put a lien on their house to get back what they are owed. Property liens are legal notices attached to a property title because of unpaid debts. This can make selling a home a lot more difficult, or at the very least a big hassle.
Unfortunately, this hassle is not always revealed until late in the home buying process—when you have already found the home of your dreams. After months of searching for houses, visiting houses, and finally finding a home and negotiating a selling price, it’s time to get a mortgage. As part of that process, the lender will require a title search. Multiple sources are searched including deeds, county land records, tax liens on the federal or state level, divorce cases, bankruptcy court records, and other financial judgments against an owner that could potentially attach to a property. If nothing comes up, the title is considered clean.
At closing, buyers will see a line in their closing costs for title insurance. Title insurance protects either lenders or owners, depending on the type, against undisclosed and undiscovered claims of ownership against the property. This includes wills, deeds, outstanding mortgages, and liens. Most buyers will not purchase a property until the liens are paid off, so the sellers usually agree to use the proceeds of the sale to pay off the liens.
Distressed sales occur when a seller urgently needs to sell a house to pay off debts. This is done via foreclosure, short sale or bank-owned sale (REO). In the first quarter of 2019, distressed sales accounted for 14.2 percent of all single-family homes and condos, down from 15.2 percent in the first quarter of 2018. These are different from conventional sales and need to be undertaken with caution.
Distressed sales often involve homes needing repairs. When a property has one lien against it, buyers should work with real estate agents to check for any other potential problems. If the house is still the one they want, the purchase can go through, but it will be harder. There are also cases where liens were put on a property but the sale is not forced. Read on to learn more.
Types of Liens
Buyers don’t like buying a house with a lien on it, so creditors know that putting a lien (or encumbrance) on a property is a cheap way of collecting what they are owed, sooner or later. Liens are part of the public record. Liens stay with the property when it is sold, but remains on the previous owner’s credit report.
There are two main types of liens: Voluntary liens and involuntary liens. Voluntary liens were agreed to by the property owner and include a first mortgage, a second mortgage taken to help purchase the property, or a home equity loan or home equity line of credit to undertake home additions.
Involuntary liens are the more worrisome ones and come in many types. They include:
- foreclosure liens (sometimes also called mortgage liens) are placed on a home if the owner does not pay the mortgage
- property tax liens
- federal tax liens (for unpaid taxes due to the IRS)
- child support liens
judgement liens (unpaid credit card company debt, medical bills and personal loans)
- municipal liens (money owed for work done to fix a local government ordinance violation that the property owner refused to fix)
- mechanic’s liens (for unpaid contractor services).
The order in which liens are paid off is generally a matter of its recording date, which means mortgage liens come first. Creditors have the right to request a property be sold to pay off a lien, usually by a foreclosure sale. But they usually don’t except for mortgage liens and tax liens because the mortgage and tax liens, called first liens, must get paid off first. Instead of foreclosing on a lien, creditors wait until a property is sold to try to recoup their money. Lenders will not give a loan for a property with a tax lien from the state or federal government because these liens take priority and must be paid off before a mortgage. This first position means the bank is at a higher risk of not getting paid back for the loan after the sale of the house.
As part of the home buying process, your lender will require a title search on the property you want to buy. Sometimes there are erroneous liens that should not be there, and they can be removed. But if any involuntary liens are found, it should be a sign to look closer at the viability of the entire deal. Since the title company assumes the responsibility for the liens once the house is sold, it will do a thorough search.
Buying a Property with Liens
Buyers, especially first-time home buyers, should work with a real estate agent when buying any property. Real estate agents know the market and the process of purchasing a home, and can help home buyers deal with issues that come up along the way. If you are considering buying a home with liens against it, this is even more important.
If the house of your dreams has liens against it, and it is not a tax lien, you can work with your real estate agent and a real estate attorney to identify all liens and negotiate with a property owner to pay them off or reduce the selling price by a corresponding amount so you can pay them off after the purchase. Lien holders are sometimes willing to clear a lien for less than the total due. There is also a possibility that liens may be filed in error, and those can be removed. You can search for property liens online.
If the lien issues cannot be resolved, but you are still interested in the house, you could proceed with a short sale. Short sales happen when a home sells for less than its current value. They usually result from homeowner’s being unable to pay their monthly mortgage but also are finding it hard to sell at a price that enables them to pay off their entire loan. In short sales, lenders agree to release the lien (usually a mortgage lien) despite getting back less than they are owed in mortgage payments.
This is different than a foreclosure, where a lender forecloses on a property to get back unpaid mortgage payments or taxes and then sell it at a public auction. Foreclosing a home typically wipes out all other liens on a property.
Short sales were more common during the housing bust of 2011, but now they account for only 5 percent of all home sales. Because short sales are tricky and risky for the bank, they can take three times as long to close as a traditional loan, or about 90 to 120 and sometimes longer. Home buyers willing to take on the challenges of closing the deal must also be willing to take on repairs. Short sale homes are sold as is. The reward is often a bargain basement price.
Lien in Or Out
The home buying process is long, stressful and confusing. Buying a home with a lien on it, or a short sale where the sale releases the lien, makes the process even longer and more confusing. Liens against a property should generally be a sign to search elsewhere, as a property owner in financial distress will not likely have been keeping up with needed repairs. Buyers who are set on a certain house, regardless of liens, must be prepared for a long road ahead. Here is one buyers story.
Own Up helps people through the entire home ownership journey. We focus on educating you so you are empowered to make the best decision about all aspects of the process. If you are considering buying a home that has liens attached to it, call us. The property might be distressed, but we can help make the home buying process less stressful. We are here to help.