Times can be tough. Let's face it, everyone has a bad patch every now and then. There may be an emergency, an unexpected expense, or even just a lapse in memory—all of which can lead to a missed payment on your mortgage. Although your credit score may take a hit, a few missed payments may not necessarily hurt you all that much—as long as you bring them back up to date. But if you don't keep up with your financial obligation, you may end up being slapped with a lien on your property. But what exactly is a lien? This article outlines the basics of liens and what they mean for homeowners.
- A lien is a legal right or claim against a piece of property by a creditor so they can collect what is owed to them.
- Most involuntary liens can be harmful to homeowners because they generally indicate there is a debt owing of some kind.
- If a homeowner continues to ignore, refuses to pay off, or settle an obligation, the lien holder may legally seize and dispose of the property.
- Although tax liens are no longer reportable, other involuntary liens may still affect your credit score.
- Homeowners can remove liens by making payment arrangements, or by paying off or settling debts.
What Is a Lien?
A lien is a legal right or claim against a piece of property by a creditor. Liens are commonly placed against property such as homes and cars so creditors can collect what is owed to them. Liens are removed, giving clear title to the property to the actual owner.
Liens can be both voluntary and involuntary. Banks take out liens automatically when a borrower is advanced a mortgage loan, making this a voluntary lien. For involuntary liens, a creditor may seek legal recourse if a loan or other financial obligation isn't fulfilled by going through legal channels to file a lien with a county or state agency. These liens may be placed by a contractor, government agency, or other kind of creditor.
The lien limits what the owner of the asset can do with the property, as creditors are given a stake in the asset to compensate for whatever is owed to them. So, if a homeowner tries to sell the home before the lien is lifted, it can present some complications—especially if the lien is involuntary.
Liens give creditors certain legal rights, especially when a debtor hasn't or refuses to fulfill the financial obligation. In these cases, the creditor may choose to dispose of the property by selling it.
Types of House Liens
There are different types of liens based on the creditor or what type of debt is owed. For example, a lien on your home by the Internal Revenue Service (IRS) indicates a debt of federal income taxes. A county can assess a house lien if property taxes have not been paid. A general judgment lien means that a general creditor is awarded a lien due to unfilled debt payments. Finally, a mechanic’s lien by a contractor means the contractor has a right to property that has been worked on if no payment has been received. A mechanic’s lien protects contractors from not receiving payment after the work has been completed.
Do Liens Hurt Homeowners?
Yes and no. Let's deal with the no first. Liens placed on homes are automatic and may not have anything to do with your repayment history. Everyone who has a mortgage has a lien like this on their home, so it may not necessarily harm you—at least if you keep up with your regular mortgage payments. Once you pay off your home, the lien is removed and you're free from the burden.
Now on to the yes. A lien of any other kind is generally bad for the homeowner. After all, who wants to be forced to share ownership of property with someone to whom you owe money? A lien indicates that debts have gone unfilled and legal matters have been taken into account. Although a lien does not mean title to the property has transferred, it can be a step in that general direction if the creditor chooses to go down that route.
This leads to the worst-case scenario. In this case, the most likely outcome is that the property can be seized and sold—especially when it comes to unpaid property taxes. This isn't as common as you'd think. But most lien holders are more likely to refrain from foreclosing in favor of waiting until the debt is settled or the homeowner sells the property.
Lien holders have the legal right to seize and sell the property in question if a debtor doesn't fulfill his or her legal obligation.
On the other hand, a lien is beneficial for creditors or industrial workers such as contractors. This is because it is a method of protecting the rights of these individuals, ensuring they receive compensation for the work they've done for the homeowner.
A Word About Credit Scores
There's often some confusion about what effects liens have on your credit score. Some liens may show up on your credit report while others don't. As of 2017, all three major credit reporting agencies—Equifax, Experian, and TransUnion—stopped reporting tax liens on consumer credit files. In fact, they removed all tax liens from their credit reporting as of April 2018. The agencies decided to stop reporting these liens because of the sheer volume of errors, inconsistencies, and disputes they received.
Other liens, on the other hand, may still impact your rating. Creditors of reportable liens must have a minimum amount of identifying information from a debtor including a date of birth or Social Security Number (SSN). A lien factors into your repayment history, which makes up more than a third of your credit score. A lien may still show up on your credit report even if it's paid off—usually up to seven years.
To Lien or Not to Lien
A lien is intended to protect a creditor and ensure the debtor settles his or her financial obligations. If reasonable steps are taken to fulfill the obligation or an alternative payment plan is arranged and adhered to, the debtor should not be constrained by a lien on the property.
But things change in the opposite situation. A creditor may choose to place a lien on property only after all attempts to settle a debt are exhausted. This means the creditor tries to contact the debtor to collect on the debt and makes no progress to settle what's owed. A debtor who doesn't keep up with debts as they come due should have a lien on some of his or her assets.
Removing a Lien
There are multiple ways to remove a lien from a home. The first way is to settle with the lien holder. The settlement process depends on the type of lien, who the lien holder is, and the value of the lien. In some cases, a lien holder may agree to remove the lien if both parties are able to come up with a suitable payment plan.
Remember: A lien is tied to a piece of property, not the property holder. For this reason, a property holder can be free of a property lien by selling the asset to which the lien is tied. However, there are a couple of downsides to this option. First, a lien holder expects to receive compensation after the property is sold. Although the seller or homeowner receives proceeds from the sale, he or she is expected to pay off the debt owed to the lien holder. There is one caveat though: The owner of the house may find it difficult to sell property that has a lien. Prospective homebuyers are not likely to purchase the property, knowing someone else has a claim to the asset.