What Is a Lien and Foreclosure?
A lien is a notice attached to your property which puts everyone on constructive notice that a creditor has a claim. A lien is typically a filed and recorded in the county public records (if involving real property) or with the secretary of state (if involving personal property). Why does a lien help a creditor? Well… in order to sell or refinance the property, the borrower’s lender is going to require clear title on the property as a prerequisite to the loan. Thus, a lien existing on your house has the negative effect of clouding the title and thus prevents you from selling your property. In order to clear title on the property, you must pay off the lien and have a release filed in the county public records putting everyone on notice of the discharge of indebtedness. If the lien is not paid off, certain lien holders can choose to foreclose on the property and recover what they owe.
The 7 Most Common Types of Liens
Property Tax Lien: When a homeowner fails to pay the taxes on his property then the city or county in which the property is located has the authority to place a lien on the property and force a sale if the taxes are not paid.
IRS Lien: An IRS lien is filed by the federal government for the failure to pay your taxes. If you happen to have equity in your property, the tax lien can be paid out of the sales proceeds at the time of closing. If the home is being sold for less than the lien amount, the taxpayer can request the IRS discharge the lien to allow for the completion of the sale. The taxpayer can also can ask that a federal tax lien be made secondary to the lending institution’s lien to allow for the refinancing or restructuring of a mortgage.
Mechanics’ Lien: A mechanic’s lien is a statutory lien that secures payment for services and labor and materials related to improvements performed on real property. State statutes creating mechanics’ liens vary by state. These statutes provide for the criteria and circumstances required for creating, filing and perfecting mechanics’ liens. Mechanic’s liens are usually classified as super liens meaning they may be superior to all existing liens previously recorded against real property, including a mortgage lien intended to be a first priority lien.
HOA Lien: Homeowners that live in a covenanted community will often be required to pay a periodic fee to the HOA to cover maintaining the community. For example, the HOA will collect fees to pay for things like landscaping, security, or maintaining the common areas such as pools, tennis courts, workout rooms, and clubhouses. To determine the amount that each homeowner must pay, the HOA will typically develop a budget and divide the total expenses by the number of homes in the community. The homeowner must pay his share on a predetermined basis throughout the year. Additionally, the HOA may levy special assessments for one-time expenses if the HOA’s reserve funds are inadequate. For example, an HOA may levy a special assessment to pay for a new road that is damaged or to replace the guard gate. If the homeowner becomes delinquent in paying their monthly fees or special assessments, a lien will be filed by the HOA and automatically attach to the homeowner’s property. This lien cloud’s title on the property and can be foreclosed in order to satisfy the debt.
Judgment Lien: A judgment lien is a type of lien that is created upon recording when a lawsuit is won against you and then attached to your property in order to receive payment upon the sale of it.
Utility Lien: A lien filed upon a property by the city or utility service for failure to pay a utility bill such as water or electricity.
Divorce Lien: A lien filed upon the property as the result of a divorce decree.
Are all liens the same?
No! Liens vary in kind and in priority. Priority is critical to a lender, and the benefits to having a first priority lien such as a first lien mortgage on the property are very important. A lender holding a senior lien in the form of a mortgage on real estate is entitled to repayment of its debt from the proceeds of a mortgage foreclosure sale before the repayment of any junior lien holder. This is very important because a foreclosure extinguishes all interests in the collateral (aka the house) that are junior to that mortgage.
What is the foreclosure process?
The foreclosure process differs from state to state. In Florida (a judicial foreclosure state), the lender files a lawsuit by way of a complaint with the clerk of courts and serves along with a summons to the borrower. The lender will include any other junior lien holders in the complaint in order to foreclose out their inferior interests such as co-borrowers or unknown tenants that may have a leasehold interest in the home. Once the borrower receives the complaint, he has 20 days to file an answer. If not, the lender will file for a default judgment. However, if the borrower files an answer, then the lender will either file subsequent affidavits in supporting his position and refute any affirmative defenses in the borrower’s answer. If the lender was unable to obtain a default judgment, a lender will likely file a motion for summary judgment. A motion for summary judgment can end a case if the lender is able to show that “no genuine issue of material fact exists and that it is entitled to judgment as a matter of law.” Most foreclosure cases end this way simply because the facts are not in dispute and entitlement to judgment is easily established as a matter of law. If the lender prevails at summary judgment or at trial if the judge failed to grant summary judgment, then the lender is granted a final judgment for a foreclosure. The judgment sets a sale date of the foreclosure (typically within 60-90 days). It is up to the lender to publish in a newspaper for two consecutive weeks prior to the sale the date and time of the foreclosure. Proof of that publication is needed to ensure all other parties received constructive notice of the sale. At the sale, the property is then sold to the highest bidder with the lender receiving a credit for his bid up to the final judgment amount. The borrower then has 10 days after the sale to file an objection to the court issuing a new certificate of title to the property in the name of the prevailing bidder. Upon recording of the new certificate of title by the clerk, the prior homeowner must vacate the property. If the homeowner does not vacate the property, the new owner may evict the old homeowner by filing a motion for writ of possession and sending the sheriff out the property to execute the writ. The sheriff will post the writ on the property giving the prior homeowner 24 hours’ notice to move out. If the homeowner does not move out, the sheriff will physically make you vacate the premises.