What Are the Different Liens That Can Be Found on Title?
There are plenty of terms to agree to when you sign a real estate contract to purchase a home. But one thing you likely would never agree to take over are liens on title. Unfortunately, liens can derail real estate deals and cause headaches for both buyers and sellers.
That’s precisely why it’s important for buyers to have a title search conducted on a property to have the home’s title looked into before the deal is sealed. The ideal outcome of a title search is a title that’s free and clear of any liens or legal issues with ownership. If not, that could be where the deal ends.
There are several types of liens that could throw a home sale off its tracks that all buyers should be aware of.
What is a Lien?
A lien is basically a claim that’s placed on title until a debt is paid off. It’s a flaw on title that must be rectified before a sale can be carried out, and until then, the lien will remain.
Sellers with liens on title will have to take steps to pay off the debt or deal with whatever situation caused the lien before they’re able to sell. It’s common for homeowners to begin the selling process without dealing with liens.
Whether they never bothered to deal with the liens or were not aware that they existed, not dealing with a lien appropriately can bring a real estate deal to a screeching halt.
So, what types of liens can you find on title during a home sale?
Many homeowners take on home improvement projects to repair or update their homes, which is a good idea considering how much extra value it can add to the property. But contractors expect to be paid for the work done, and if the homeowner doesn’t pay up, the contractor involved can place a lien on the title until the full debt is repaid.
Whether the homeowner withholds payment on purpose for a job they’re not satisfied with or simply didn’t have enough money to pay the entire the bill, the disgruntled contractor can slap a lien on title until they get the money owed.
Lenders who hand out mortgages for homes have liens on properties they finance. Technically, until the mortgage is paid off in full, the homeowner doesn’t really own the home. Instead, the lender does until the homeowner completely pays off the mortgage. Until then, a property lien will be placed on title.
This type of lien doesn’t necessarily stop a seller from selling their home. Instead, when the home is sold, the first party paid with the proceeds of the sale is the lender. Whatever money is left over can then be kept by the seller, minus all costs associated with selling real estate.
Once the home is sold and the lender is paid accordingly, the mortgage should be discharged. Unfortunately, there may be some rare cases where the mortgage is not properly discharged, which can cause problems when it comes time to sell. Regardless, this lien must be cleared up for a sale to take place.
If the property in question is governed by an HOA, the association can place a lien on one of its properties if the homeowner is behind on HOA fees. Living in an HOA typically requires unit owners to pay monthly dues to cover the cost of maintenance and repairs of common elements.
But if a homeowner fails to make timely payments and becomes delinquent, the HOA can place a lien on the unit, which can throw a wrench in any potential sale.
The IRS has very strict rules about how and when taxes are to be paid. There are all sorts of different taxes that Americans are required to pay, including income taxes, school taxes, sales taxes, and property taxes, to name a few.
If a homeowner has failed to pay any one of these taxes, the IRS has the power to place a lien on title. Just like any other type of lien, a tax lien puts a homeowner in the position to pay the tax amount owed – plus interest – before selling the property.
A creditor may go to court to have a legal judgment lien placed on title of a home if a consumer has not fulfilled their duty to repay all their debt. This type of lien is a court ruling that allows a creditor to take possession of a debtor’s home if any associated contractual responsibilities aren’t carried out.
Basically, a judgment lien is created when a party wins a lawsuit against a homeowner and records the judgment against the home. There could be any number of reasons for legal action to take place. Regardless, the end result may be a judgment lien, which must be dealt with before the home can be sold.
The Bottom Line
Liens are a nuisance, both for buyers and sellers. But if a lien is found on title of a home, that doesn’t necessarily mean that a transaction can’t take place, as long as the lien is dealt with accordingly and taken off title. Until then, the deal will likely be stalled.