A lien gives a person or entity, the lien holder, a legal interest in property that belongs to someone else. The lien is tied to an underlying financial obligation, such as the payment of a debt owed by the property owner or a tax obligation.
Mortgages are one of the more common types of liens on property. The borrower obtains the loan and purchases property, but the lender, as the lien holder, places a lien on the property. The lien gives the lender certain rights if the borrower fails to pay mortgage loans.
Sometimes, tax liens give the government a legal interest in a taxpayer’s property to secure the payment of unpaid taxes. If the property is sold, the unpaid tax lien must be paid out of the sale proceeds before the seller receives their portion. In addition, tax liens may take priority over other kinds of liens.
What Rights Does a Lien Holder Have?
The lien holder does not actually own the property. However, they do have certain rights to the property. In the case of a mortgage, the mortgage lender has the right to force the sale of the property if the mortgage borrower fails to make loan payments when they are due. This is called “foreclosure.”
In other cases, the lien holder’s rights do not include forcing a sale; however, they can collect the amounts they are owed if the property is sold or refinanced. If the loan underlying the lien is not paid off when the owner, or a mortgage lender, decides to sell the property, then the lien holder has a right to a share of the sale proceeds, the amount the lien entitles them to collect.
In real estate transactions, lien holders are usually paid first before the remainder of the proceeds from the sale are disbursed to the property seller. The seller walks away with nothing if nothing remains after the mortgage lenders and other lien holders are paid.
What Is a Junior Lien Holder?
It is not uncommon for people to have multiple liens on their property. Many people carry second mortgages or Home Equity Lines of Credit (also called HELOCs) on their homes. The holders of these secondary liens are referred to as “junior lien holders” because they are junior to the first existing mortgage.
In everyday cases, there is no real difference between junior and senior lien holders as long as all the bills are paid on time. When there is a default on one of the loans, the order of things becomes important, especially in foreclosure proceedings.
What Rights Do Lienholders Have in a Foreclosure Proceeding?
As noted above, foreclosure happens when a borrower defaults on their mortgage payments. In most cases, the real estate subject to the mortgage, usually a home, is collateral for the mortgage loan. If a borrower defaults on their mortgage payments, the lender has the right to take possession of the home and sell it in a foreclosure sale.
In foreclosure proceedings, an entity that has placed a lien on the property is legally entitled to receive some of the proceeds from the foreclosure sale. The lien holders are paid in order of seniority. This is where the distinction between senior and junior lien holders becomes important.
When the property is sold, the first mortgage lender gets paid first. If there is a second or subsequent mortgage, they are paid next. Then lien holders whose liens are not related to mortgage debt are paid next. In some cases, government tax authorities who have placed tax liens on the property have priority among lien holders.
For example, Betty owned a house and had a $200,000 mortgage with Bank ABC. Two years after she took out her first mortgage with Bank ABC, Betty took out a second mortgage for $50,000 with Bank XYZ. Betty defaulted on her first mortgage, and Bank ABC foreclosed on the property. At the foreclosure sale, the home sold for $250,000. Because Bank ABC’s mortgage lien came before Bank XYZ, Bank ABC is entitled to be paid first out of the property sale proceeds. Bank XYZ does not get paid until Bank ABC gets paid.
In some cases, there may be several liens on the property, which means that lien holders farther down the payment line might not get paid at all if the sale proceeds are exhausted. This is why many lenders will require liens to be paid off in refinance transactions–to ensure that the new mortgage created by the refinance will be first in line to be paid in case of foreclosure.
What Determines the Order in Which Liens Are Paid in Foreclosure?
When a property is sold in a foreclosure sale, the proceeds of the sale are distributed as follows:
- Costs and Fees: The foreclosure process costs must be paid first. These would include attorney’s fees and possibly court costs and real estate fees;
- Senior Mortgage: As noted above, the most senior mortgage is paid next and before other mortgages and liens. Which mortgage is the first or most senior depends on when the mortgage lien or deed of trust associated with the mortgage loan was recorded in the office of the county recorder of the county in which the property is located;
- Junior Mortgages: Any subsequent mortgages are paid in the chronological order in which they were recorded in the property records of the county recorder;
- Liens: The priority of a lien is also determined by the date on which it was recorded, as is true for mortgages. Judgment liens will likely be junior to a first and possibly a second mortgage. Again, liens are paid in order of priority according to the dates on which they were recorded;
- Tax Liens: Tax liens, such as property tax liens, have priority, even over other liens that may have been recorded before them in time;
- Remaining Funds: If any funds are left after all mortgages and liens have been paid, then the borrower, the former owner of the home, receives the remaining funds. If nothing is left, then the former owner of the home receives nothing.
Can a Junior Lien Holder Foreclose?
A junior lien holder, i.e., a second or subsequent mortgage lender, may foreclose on a property. However, it is not the norm for a junior lien holder to foreclose if the senior lien is still in place. If a foreclosure occurs, the senior lien holders are still paid first, even if the junior lien holder initiates the foreclosure proceedings.
Many disputes concern the payment order during foreclosure proceedings, especially if the property sells for less than the amount owed because this creates the risk that someone will not be paid.
Do I Need the Help of a Lawyer with My Lien Issue?
If you have a lien on your property, it is best to talk to a lawyer about how best to handle it. A qualified foreclosure lawyer can answer any questions you have regarding mortgage lenders and other lien holders and their rights when it comes to your property so that you know what to expect.
Your lawyer can also explain how liens work in your state and how to remove the liens from your property. This usually involves paying off loans or debts. If you are facing a lawsuit and need to appear in court, your lawyer can also represent you and help you navigate the legal system to achieve the best possible outcome for your case.