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What is a Lien and How Lien Priority Works?
A lien refers to a legal claim that gives a creditor rights to sell a property in case of default. Lien priority refers to an order in which holders are paid if the property is sold.
Lien priority is essential for creditors and property owners. For creditors, lien priority enables them to recover their debt. For property owners, lien priority affects their ability to sell the property or obtain financing.
Learn more about the lien, types of liens, and how a lien works.
What is a Lien and How Does It Work?
A lien is a legal claim that a lender or creditor has over someone else's property as security for a debt. It gives the creditor or lienholder the right to foreclose on the property to recover the debt.
Before issuing a loan, a creditor should check property records to determine if other loans have been recorded with the property.
Lien priority determines how different liens are paid when the property is sold or if the owner defaults on their obligations.
Here is how lien priority works:
As per Article 9 of the Uniform Commercial Code, the lien with the higher priority is one that was recorded first. However, there are applicable exceptions and variations in lien priority rules depending on the jurisdiction and the type of lien.
The lien with the highest priority is usually the first to be paid. It includes property lien tax and mortgage liens.
The next lien in priority is the one that gets paid after the first lienholder. If proceeds are left after the first lien has been fully paid, the second-lienholder debt is paid off.
Other liens ranked below the first and second liens are considered subsequent liens. They are paid if there is money remaining after paying the higher-priority liens. It includes homeowner association liens.
The amount of the debt does not necessarily determine the Lien's priority but rather the time when the lien was created. This explains why a smaller debt with a higher-priority lien is paid off in full before a larger debt with a lower-priority lien.
Common Types of Liens and Their Priority
Lien priority mostly follows the first-in-time, first-in-right rule. However, it can vary depending on each jurisdiction's laws and regulations.
Here are common types of liens and their priority.
Property tax liens are considered the highest-priority liens. They are usually given first priority over other liens on the property. The state uses lien tax to pay all the other unpaid taxes.
They are created when a person uses a loan to purchase a property. Mortgage liens also have first priority when recorded during property purchase.
These liens are filed by unpaid contractors, subcontractors, or suppliers after providing labor or materials for property improvements. They are prioritized based on the date of filing. Earlier filed liens will take precedence over later ones.
This non-consensual lien is created when a court awards a judgment against a debtor, and the lien is placed on the property. The priority of judgment liens is ranked as per the entry date. However, priority can vary depending on the state.
HOA Assessment Lien
Lien priority for homeowner association (HOA) or condominium association (COA) assessment liens vary depending on local laws. It is considered a lower priority and is usually given priority after the other priorities.
What Is the Financial Impact of Lien Priority?
Lien priority impacts the financial status of the creditors and property owners differently. It determines the order in which lienholders get paid in the event of a sale or foreclosure of the property.
A lien with higher priority has a higher chance of getting paid, unlike those with lower priority.
For property owners, a property with a lien risks being sold, therefore, a great loss compared to one without a lien.
How Do Property Liens Work?
Property liens are legal claims placed on a property to secure debt payment. If the debt is not paid, the lienholder can foreclose on the property to settle the debt.
Property liens come in various forms.
Voluntary and involuntarily. A voluntary lien is made with an agreement with the owner, like the mortgage lien. On the other hand, an involuntary lien is made without the property owner's consent. This includes tax and judgment liens.
General and specific lien. A general lien applies to all the assets owned by the property owner. An example is a judgment lien. Specific lien refers to particular assets used to secure the loan, E.g., mortgage lien.
How it Works
- A lien is created when there's an unpaid debt. The creditors make lien records with the appropriate government office.
- Liens are first considered in terms of priority. Property tax liens are prioritized, followed by mortgages, mechanics, judgment, and HOA liens.
- Property owners are then notified when a lien is placed on their property.
- If the debtor doesn't pay, the lienholder can take legal action, like foreclosure of debt.
- Once the debt is paid, the lienholder must release the lien by recording a lien release.
- A lien on a property affects the owner's ability to sell or refinance the property.
Removing Property Lien
Having your property on lien is not the end of the road. Here are measures you can take to remove your property on lien.
- Paying the debt
- Declare the lien invalid in court
- Negotiate how you'll repay the debt with the lienholder.
How Different types of liens Affect Creditors and Property Owners
Different lien has different impact on creditors and debtors.
Liens with higher priority are more likely to be paid than liens with lower priority. This has a positive impact on creditors with higher-priority liens.
If a property has a first-priority mortgage lien, the lender holding that lien will have the first claim to the proceeds from the sale.
Other creditors with lower priority liens, such as contractors or judgment lienholders, may receive payment only if there are remaining funds after the higher priority liens are settled.
Like creditors, owners can also be impacted differently depending on the type of lien. A property with a lien is worth less than one without a lien. Also, liens with higher priority are likely to be fully settled in case of foreclosure.
Understanding the Lien Can Help Guide Your Future Choices
Lien priority has a significant impact on creditors and property owners. For creditors, it determines their ability to recover their loan. For property owners, it affects their ability to resell or refinance their property. Involving a legal attorney is crucial to help you navigate the complex lien property issues.
Understanding which liens are higher or lower is essential for creditors and property owners. Visit our website for more information on Lien priority or related topics.