Liens often have negative connotations for homeowners. Yet if you’re reading this article, you may be surprised to find out that you already have a lien on your home and that liens are not always as bad as they sound. Here’s what you need to know.
Understanding How Liens Work
A property lien is a legal claim against a property, allowing the creditor to use it as collateral to collect what they’re owed if the debtor cannot make payments.
Consider this common scenario to better understand how liens work: taking out a loan to finance a purchase. To secure loan repayments for the duration of the contract, the lender will use one of your assets as collateral. In most cases, the chosen asset will be your home. However, if you fail to repay the loan through some unfortunate circumstances, the lender can file a property lien on your home with the local county office. This gives them the legal right to force the sale of the property to recover the amount they’re being owed.
In the U.S and Canada, the most common property liens result from falling back on mortgage payments. Yet homeowners can also be faced with a lien if, for example, they fail to pay taxes and even bills of contractors working on their property.
Types of Liens
Property liens can be split into two main categories: consensual (or voluntary) and non-consensual (involuntary). Let’s take a closer look at each one.
Consensual or Voluntary Liens
As the name suggests, a consensual lien is one that you consent to. In the simplest of terms, any time you take out a loan, you voluntarily agree to have a consensual lien. Taking out a mortgage loan is the most common example, but liens can also occur when taking out a line of credit. In the case of a mortgage, your home is used to secure your obligation to pay for the newly acquired asset. And as long as you stay on top of the payments, you will retain ownership of the property.
Involuntary or Non-consensual Liens
Involuntary liens are any liens attached to your property without your consent. They result from local laws being enforced and can be put on a home by a lender, a tax authority or a legal judgment.
- Mortgage lien: this lien may start as consensual, but if you default on your payments, the lender has the legal right to take possession of your home and sell it to recuperate losses. Out of all property lien types, this one is the most likely to result in foreclosure if you are more than 120 days overdue on payments.
- Tax lien: if you fall behind on paying your property or income taxes, the state may put a tax lien on your home. As with overdue mortgage payments, the taxing authority can sell the property through a foreclosure to settle the debt.
- Mechanic lien: this type of lien occurs if a mechanic or contractor is not paid for the work they performed on your property. In some cases, it can also occur if the contractor did not pay their supplier for the materials used for the work.
- Judgment lien: occurs when a creditor wins a lawsuit against a debtor, and they become entitled to the funds resulting from the sale of the debtor’s property to settle the debt. It can result from loan nonpayments, but also in case of accidents and injuries where insurance is not enough to cover medical bills, for example.
Is It Bad to Have a Lien on Your House?
The short answer is: it depends. For example, consensual liens will be visible on your credit report, yet as long as you’re up to date with your payments, they do not damage your credit score. In fact, consensual liens can benefit your credit score, letting banks and lenders know that you are a trustworthy borrower.
Liens become problematic if they are the result of nonpayment. Keep in mind that your payment history makes up a significant part of your credit score, and late payments can deduct valuable points. In addition, tax, mechanic, and judgment liens will remain on your credit report for seven years, so it’s best to avoid them at all costs.
Removing a Lien From Your House
The best way to remove a property lien is to pay off your underlying debt. Alternatively, you can also negotiate a partial payoff with the lienholder or, in the case of judgment liens, file a lien avoidance motion with the Supreme Court.