WHAT IS Prior Lien
BREAKING DOWN Prior Lien
A prior lien is a first lien on a specific piece of collateral. Collateral refers to a property or other asset that a borrower offers in order to secure a loan from a lender. If the borrower stops making the promised loan payments, the lender can seize the collateral to recoup its losses. Since collateral offers some security to the lender should the borrower fail to pay back the loan, loans that are secured by collateral typically have lower interest rates than unsecured loans. A lender's claim to a borrower's collateral is called a lien; thus, a prior lien is the first loan taken out on the piece of collateral.
The type of collateral for a loan may be predetermined based on the loan type, such as with a mortgage or an auto loan, or may be flexible, such as a collateralized personal loan. For a loan to be considered secure, the value of the collateral must meet or exceed the amount remaining on loan. In the case of a mortgage, the collateral is the house purchased with the funds from the mortgage, and that mortgage constitutes a prior lien. If payments on the debt cease, the lender can take possession of the house through a process called foreclosure. Once the property is in the lender’s possession, the lender can sell the property to get back the remaining principal on the prior loan.
Prior Liens in the Real World
A lien is the legal right granted by the owner of property, either by law or otherwise acquired by a creditor. A lien serves to guarantee an underlying obligation, such as the repayment of a loan. If the underlying obligation is not satisfied, the creditor may be able to seize the asset that is the subject of the lien.
The most common form of a prior lien is a first mortgage, or primary mortgage. A first mortgage is the primary loan that pays for the property and it has priority over all other liens or claims on a property in the event of default. Thus the first mortgage is a prior lien, as it must be paid before any other mortgages or claims on the property.
When an individual wants to buy a property, they may decide to finance the purchase with a loan from a lending institution. The lender will have a lien on the property since the loan is secured by the home. A homeowner could take out another mortgage, such as a second mortgage, while still paying off the original and first mortgage. The second mortgage is money borrowed against a home equity to fund other projects and expenditures. However, the second mortgage and any other subsequent mortgages taken out on the same property are subordinate to the first mortgage, and the first mortgage is a prior lien to the second mortgage.