A lien gives a person, company, or entity a legal interest in someone else’s property. A lien holder is the person or entity that retains the interest. Usually the lien is tied to an underlying obligation, like the repayment of a loan.
Mortgages are the most common example of liens on property. The borrower obtains the loan, but the lender (as the lien holder) retains a lien on the property, which means that they have certain rights in the event of a sale of the property or if the borrower defaults on their mortgage payments.
In some cases, tax liens give the government a legal interest in the property in order to secure the payment of unpaid taxes. In the event that the property is sold, the unpaid tax lien must be paid out of the proceeds of the sale before the seller receives their portion of the proceeds.
What Rights Does a Lien Holder Have?
The lien holder does not actually own the property. However, they do retain certain rights to the property, which generally kick in if the property is sold or refinanced, or if there is a default on a loan that affects the property. If the loan underpinning the lien is not paid off when the owner goes to sell the property, then the lien holder has a right to a share of the proceeds of the sale. The share of the proceeds is intended to pay off the outstanding remainder of the loan.
In real estate transactions, lien holders are usually paid first, as part of the transaction. This happens before the remainder of the proceeds from the sale are disbursed to the seller of the property.
What is a Junior Lien Holder?
It is not uncommon for people to have multiple liens on their property. Many people carry second mortgages or Home Equity Lines of Credit (also called HELOCs) on their homes. The holders of these secondary liens are referred to as “junior lien holders,” because they are junior to the first existing mortgage.
In everyday cases, there is no real difference between junior and senior lien holders, as long as all the bills are paid on time. It is when there is a default on one of the loans where the order of things becomes important, especially in foreclosure proceedings.
What Rights Do Lienholders Have in a Foreclosure Proceeding?
Foreclosure happens when a borrower defaults on their mortgage payments. In most cases, the real estate that is subject to the mortgage (usually a home) is used as collateral for the mortgage loan. If a borrower defaults on their mortgage payments, the lender takes possession of the home and sells it at what is called a foreclosure sale.
In foreclosure proceedings, lien holders are entitled to receive some of the proceeds from the foreclosure sale. The lien holders are paid in order of seniority. This is where the distinction between senior lien holders and junior lien holders becomes important. When the property is sold, the senior lien holder (the first mortgagor) gets paid first. The next junior lien holder in line gets paid next, and then the next junior lien holder, and so on.
For example, Betty owned a house and had a $200,000 mortgage with Bank ABC. Two years after she took out her mortgage with Bank ABC, Betty took out a second mortgage for $50,000 with Bank XYZ. Betty defaulted on her first mortgage, and Bank ABC foreclosed on the property. At the foreclosure sale, the home sold for $250,000. Because Bank ABC’s mortgage lien came before Bank XYZ, Bank ABC is entitled to be paid first out of the proceeds of the sale of the property. Bank XYZ does not get paid until Bank ABC gets paid.
In some cases, there may be several liens on the property, which means that lien holders farther down the line of payment might not get paid at all if the proceed funds run out. This is why many lenders will require liens be paid off in refinance transactions–to ensure that the new mortgage created by the refinance will be first in line to be paid in case of foreclosure.
Can a Junior Lien Holder Foreclose?
Yes, although it is not the norm for a junior lien holder to foreclose if the senior lien is still in place. The senior lien holders will still get paid first, even if the foreclosure proceedings are initiated by the junior lien holder. Many disputes concern the order of payment during foreclosure proceedings, especially if the property sells for less than the amount owed and there is a risk that someone won’t get paid.
Should I Talk to a Lawyer if I Need Help with Lien Issues?
If you have a lien on your property, it is in your best interests to talk to a lawyer about how to best handle it. A qualified foreclosure lawyer can answer any questions you have regarding lien holders and their rights when it comes to your property, so that you know what to expect.
Your lawyer can also explain how liens work in your state and how to remove the liens from your property (which usually involves paying off loans or debts). If you are facing a lawsuit and need to appear in court, your lawyer can also represent you and help you navigate the legal system in order to achieve the best possible outcome for your case.