Selling a House With a Lien — A Guide for Homeowners
Whether the cause is unpaid taxes, unpaid alimony, or unpaid contractor bills, selling a house with a lien against it adds one more wrinkle to the already complex task of a home sale.
But don’t fret. “Nine times out of 10 the lien can be paid off through the sale,” says Richie Helali, Mortgage Sales Lead at HomeLight Home Loans. “This way the seller doesn’t need to come up with [the debt] out-of-pocket earlier.” In other words, the proceeds from the sale can be used to cover the unpaid bills.
In this guide, we’ll fill you in on everything you need to know about selling a house with a lien and the steps to take to get to the closing table.
Can you sell a house with a lien?
Homeowners can sell properties with liens. For a buyer to take possession of the property, the seller will need to clear title and satisfy all outstanding liens.
Stephen Donaldson, a real estate attorney and founder of The Donaldson Law Firm in New York explains that creditors record liens in the county clerk’s office in order to protect their interest. “The lien puts the world on notice of the creditor’s interest in the property.”
“If an owner tries to sell their house, a title search will identify any liens recorded against the property. In order for the sale to occur, the title company ensures that any liens are satisfied at closing so the buyer can take title free and clear of any liens.”
The following payment options are worth considering to clear your title:
Pay the debt upfront
Negotiate the debt for a lesser amount you can afford
Dispute debt errors with the assistance of an attorney
Work the payoff into the sale proceeds
Types of property liens
Property liens can be voluntary or involuntary. Mortgage liens, for instance, are voluntary; the borrower agrees to have a lien recorded against their property as collateral for the loan. Other liens are involuntary; they’re recorded by a creditor or a plaintiff who won a judgment for an unpaid debt.
Mortgage lien
The most common type of property lien is a mortgage. There are typically two levels or priorities of mortgage liens: primary and secondary.
Primary lien: The first mortgage is the primary lien. “A mortgage lender always wants to make sure they have that first priority lien,” says Donaldson. “If a homeowner defaults, the lender wants to ensure they get as much money back as possible first without any regard to the second lien holder.”
Secondary lien: If a homeowner already took out a mortgage to be recorded against the property to buy the house, they already have some home equity and may wish to borrow against that equity from the same or a different lender, Donaldson explains, in the form of a second mortgage.
“In order to get that home equity line of credit, that lender would have a lien in the second position or a second priority lien,” according to Donaldson.
Tax lien
The government has the power to record tax liens on properties when the homeowners owe back taxes. To remove the lien, the property owner will need to satisfy the debt. Homeowners can also enlist the help of a real estate attorney to either negotiate or dispute the lien.
Tax liens often take priority over all other liens, including primary mortgage liens. This is part of the rationale behind most mortgage lenders including property taxes in mortgage payment schedules, and paying taxes on behalf of the borrower through an escrow account – it helps mitigate risk and protect the lenders’ interest in the property.
The federal government also has the power to file IRS liens against property owners who fail to pay back income taxes on money they’ve earned. When IRS liens remain unpaid, the federal government can foreclose on a property to collect the debt. It’s also important to note that state and local governments may also file tax liens for nonpayment of state or local levies and taxes.
Judgment lien
Judgment liens, or judicial liens, are recorded against real estate when a judge issues a judgment against a property owner who loses a lawsuit and court-ordered damages remain unpaid. Selling a house with a judgment lien requires court approval.
Child support and alimony liens
If a property owner fails to pay court-ordered alimony or child support, a lien can be placed against the property. The judge may allow the owner to sell the home, however, court approval can take a long time, reports Helali.
HOA lien
Homeowner associations can record liens for unpaid dues and outstanding fines. HOAs may initiate foreclosure even when mortgage payments are current if the state and the association’s covenants, conditions, and restrictions allow it.
Mechanics lien
A mechanics lien, also known as a construction lien, can be recorded against a property for unpaid construction work, beginning 90 days after payment is due. Like other liens, mechanics liens can cloud a title making it difficult to sell a property. Liens that fall under the broader category of mechanics liens include:
Materialman’s or supplier’s liens: for contractors that supply materials for construction or home improvement projects
Designer liens: recorded by engineers, architects, and other designers when services remain unpaid
