Mortgage liens are attached to a property’s title so that a creditor can use the home as collateral in case the debt is not paid. There are two types of mortgage liens: voluntary and involuntary. Lenders see involuntary liens as a red flag for risky borrowers, which will make it harder to qualify for credit. Failing to pay a home loan when there is a mortgage lien on your title can lead to a foreclosure, which will stay on your credit report for seven years.
Mortgage liens are part of your mortgage loan. They allow lenders to use a borrower’s personal property as collateral if they do not pay their loan in time. Liens get a bad wrap in general and many people worry that having one will hurt their credit. As long as you’re making your payments, mortgage liens generally don’t have an impact on your credit rating or history. Involuntary liens are another matter altogether. Keep reading to understand the ins and outs of mortgage liens, and which ones should be avoided.
What is a mortgage lien?
If you purchase a home with a mortgage, your lender will place a mortgage lien on your property. Mortgage liens allow your mortgage lender to take possession of the home if you fail to repay the loan. Liens are a legal claim against property that allows lenders to collect what they’re owed if they are not paid. So long as the borrower continues to make the required payments, your personal property will never be seized. Once your mortgage loan is paid off, the lien on your property is removed.
Voluntary vs. involuntary liens
There are two types of liens: voluntary and involuntary. You set up a voluntary lien when you agree to provide your property as security for a loan. Involuntary liens, on the other hand, are usually placed on the borrower’s property without their approval.
Mortgage liens are the most common type of voluntary liens. Involuntary liens are usually placed on a borrower’s property when there is money owed to a creditor. Obviously, involuntary liens should be avoided.
There are four main types of involuntary liens.
Homeowners Association Liens
If you are part of a homeowners association (HOA), a homeowners association lien will be placed on your property if you fail to pay the necessary fees. This usually occurs after warnings are given and late payment fees are implemented. A foreclosure could happen but is usually a last resort, as the HOA would have to pay property taxes.
A judgment lien occurs when a creditor or individual earns the right in a court of law to place a lien on your property until they’re paid what is owed. Judgment liens can be placed by collectors of unpaid personal loans, medical bills, or credit card debt.
If you hire a contractor and do not pay them for their work, the contractor can place a lien on your property.
There are two main types of tax liens.
- Property tax liens: A property tax lien is given by the state or local government for unpaid property taxes.
- Federal tax lien: Failure to pay federal taxes can lead to the government placing a lien on your property. This property could include vehicles, finances, or real estate assets. If you continue to not make payments, the IRS can foreclose and sell your property.
Thankfully, there are resources available to remove your tax liens.
How can I find my lien?
Mortgage liens are a matter of public record. In most states, you can search for your lien by contacting your local Secretary of State, county recorder, clerk, or assessor’s office online. You can find your liens by searching the name of the property owner and address on the website of your assessor, recorder, or county clerk. If it’s not available online, you can also check the office in person.
Liens affecting your mortgage
Most liens are expected to be paid off before you apply for a mortgage, or by closing the mortgage. You may also have to reestablish credit for 12 months before applying for a loan or have a letter explaining the reasoning behind the liens.
If a borrower does not make the necessary payments, it is the lender’s legal right to seize the property. This is called a foreclosure. Having your home foreclosed can make it extremely difficult to earn another mortgage. You won’t have any mortgage options for a year after the foreclosure. Some other loans won’t be an option until after three or even seven years have passed. Foreclosures are usually used as a last resort and should be avoided.
Frequently asked questions
Do all mortgages have liens?
Yes. Your property is used as collateral in a mortgage loan. This is a mortgage lien, and it is not necessarily a bad thing.
Is it bad to have a lien on my property?
Not all liens are bad. Voluntary liens, such as mortgages liens, are fine. A mortgage lien generally demonstrates that you are paying your loan back in a timely matter. This can help your credit. However, an involuntary lien could potentially make it difficult to get a loan and should be avoided.
Can an involuntary lien damage my credit score?
It was decided in 2018 that tax liens and judgment liens can no longer damage someone’s credit score. However, having an involuntary lien can make it difficult to receive a loan.
How can I avoid involuntary liens?
Involuntary liens are issued when a payment has not been met. They are usually issued by contractors, creditors, or the IRS. Make sure you promptly pay your taxes, contractors, and debts.
- A mortgage lien refers to the right a lender has to take your property if you fail to pay your debt. It means you home is collateral for a secured loan.
- Mortgage liens are not necessarily a bad thing. Most people agree to a mortgage lien to purchase their home. However, involuntary liens are different.
- Creditors will typically attach an involuntary lien to your property when you fail to pay the debt. They don’t require the approval of the borrower for them to recorded on your property.
- Liens are removed when the amount due has been paid off.
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Camilla has a background in journalism and business communications. She specializes in writing complex information in understandable ways. She has written on a variety of topics including money, science, personal finance, politics, and more. Her work has been published in the HuffPost, KSL.com, Deseret News, and more.