Definition
A lien is a legal claim or right that a lender, government agency, or creditor places on a property as collateral for unpaid debt. A lien must be settled before the property can be sold or refinanced, as it gives the lienholder the right to seize the property if the debt is not repaid.
Explanation
Liens are commonly placed on real estate by mortgage lenders, contractors, or government entities for unpaid debts, taxes, or services. The lienholder has a legal interest in the property until the debt is paid. Some liens are voluntary (such as a mortgage lien), while others are involuntary (such as a tax lien or mechanic’s lien for unpaid work).
There are several types of liens:
- Mortgage Lien – A lender places a lien on a home until the mortgage is fully repaid.
- Tax Lien – The IRS or local government places a lien due to unpaid property taxes or income taxes.
- Mechanic’s Lien – A contractor or supplier places a lien for unpaid construction work or materials.
- Judgment Lien – A court orders a lien on property due to unpaid debts, lawsuits, or legal judgments.
- HOA Lien – A homeowners association places a lien for unpaid association fees or violations.
Liens are recorded in public records and can impact a property’s marketability. If a property has an active lien, it must typically be paid off (cleared) before it can be sold or refinanced. In some cases, lienholders may foreclose on the property to recover their debt.
Example
A homeowner falls behind on their property taxes, and the county government places a tax lien on the home. When the homeowner tries to sell the property, the title company discovers the unpaid tax lien and informs the seller that they must pay off the lien before the buyer can receive a clear title to the property.