Times can be tough. Everyone goes through a bad patch every now and then. An emergency, unexpected expense or even just a memory lapse can lead to a missed mortgage payment. While your credit score may suffer, a few missed payments may not necessarily hurt you that much—as long as you bring your account current. But if you don't keep up with your financial obligations, you may get hit with a lien on your property. What exactly is a lien? This article outlines the basics and what liens mean for homeowners.
- A lien is a legal right or claim against a property by a creditor so they can collect what is owed.
- Most involuntary liens are harmful to homeowners because they indicate a debt owing of some kind.
- If a homeowner continues to ignore or refuses to 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 impact your credit score.
- Homeowners can remove liens by making payment arrangements, or by settling debts.
What Is a Lien?
A lien is a legal right or claim against a property by a creditor. Liens are commonly placed against property such as homes and cars so creditors can collect what is owed. Liens can also be removed, giving the owner clear title to the property.
Liens can be voluntary or involuntary. Banks take out liens when a borrower is advanced a mortgage, making this a voluntary lien. For involuntary liens, a creditor may seek legal recourse by filing a lien with a county or state agency if a loan or other financial obligation hasn't been met. Liens can be placed by a contractor, government agency or other kind of creditor.
Liens limit what the owner can do with an asset, as creditors are given a stake in the property to compensate for what is owed to them. So, if a homeowner tries to sell a property before a lien has been 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 their financial obligation. In these cases, the creditor may choose to dispose of the property by selling it.
Types of House Liens
Liens differ based on the creditor or what type of debt is owed. For example, a lien on your property from the Internal Revenue Service (IRS) is due to unpaid federal taxes. A county can assess a lien if property taxes have not been paid. A general judgment lien means a general creditor has been awarded a lien due to neglected debts. Finally, a mechanic’s lien means a contractor has a right to property they worked on if no payment has been received.
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 the yes. A lien of any other kind is generally bad for the homeowner. A lien indicates that a debt has gone unpaid, resulting in legal action. Although a lien does not mean title to a property has been transferred, it can be a step toward that direction if the creditor decides.
This leads to the worst-case scenario. One potential outcome is the property is seized and sold, especially if due to unpaid property taxes. This isn't as common as you'd think. Most lien holders will refrain from foreclosing in favor of waiting for the homeowner to settle the debt or sell the property.
Lien holders have the legal right to seize and sell the property in question if a debtor doesn't fulfill their legal obligation.
On the other hand, a lien is beneficial for creditors or workers such as contractors. This is because liens are a way to protect their rights, ensuring they receive due compensation for work performed for the homeowner.
A Word About Credit Scores
There is often confusion about how liens impact your credit score. Some liens appear on your credit report while others don't. The three major credit reporting agencies Equifax, Experian and TransUnion removed tax liens from their credit reports as of April 2018. The agencies stopped reporting tax liens because of the number of errors, inconsistencies and disputes they received.
Other liens may still impact your rating. A lien factors into your repayment history, which makes up more than a third of your credit score. 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 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 their financial obligations. If reasonable steps are taken to fulfill the obligation or an alternative payment plan is arranged and followed, 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 after all attempts to settle a debt have been exhausted. This means the creditor has tried to contact the debtor to collect on the debt and has made no progress to settle what's owed.
Removing a Lien
There are multiple ways to remove a lien from a home. The first 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 can agree to a payment plan.
Remember: a lien is tied to a property, not the property owner. For this reason, a property holder can be free of a property lien when they sell the asset to which the lien is tied. But there are downsides. Although the homeowner receives proceeds from the sale, they are expected to first pay off what is owed to the lien holder. And a homeowner may find it difficult to sell property that has a lien against it. Prospective buyers may avoid a property to which someone else has a claim.