Whether the cause is unpaid taxes, unpaid alimony, or unpaid contractor bills, selling a house with a lien against it adds one more wrinkle to the already complex task of a home sale.
But don’t fret. “Nine times out of 10 the lien can be paid off through the sale,” says Richie Helali, Mortgage Sales Lead at HomeLight Home Loans. “This way the seller doesn’t need to come up with [the debt] out-of-pocket earlier.” In other words, the proceeds from the sale can be used to cover the unpaid bills.
In this guide, we’ll fill you in on everything you need to know about selling a house with a lien and the steps to take to get to the closing table.
Can you sell a house with a lien on it?
Homeowners can sell properties with liens. However, for a buyer to take possession of the property, the seller will need to clear title, and liens must be satisfied.
Creditors record liens with the county clerk’s office in order to protect their interest, explains Stephen Donaldson, a real estate attorney and founder of The Donaldson Law Firm in New York. “The lien puts the world on notice of the creditor’s interest in the property.”
“If an owner tries to sell their house, a title search will identify any liens recorded against the property. In order for the sale to occur, the title company ensures that any liens are satisfied at closing so the buyer can take title free and clear of any liens.”
The following payment options are worth considering to clear your title:
- Pay the debt upfront
- Negotiate the debt for a lesser amount you can afford
- Dispute debt errors with the assistance of an attorney
- Work the payoff into the sale proceeds
Types of property liens
Property liens can be voluntary or involuntary. Mortgage liens, for instance, are voluntary; the borrower agrees to have a lien recorded against their property as collateral for the loan. Other liens are involuntary; they’re recorded by a creditor or a plaintiff who won a judgment for an unpaid debt.
The most common type of property lien is a mortgage. There are typically two levels or priorities of mortgage liens: primary and secondary.
Primary lien: The first mortgage is the primary lien. “A mortgage lender always wants to make sure they have that first priority lien,” says Donaldson. “If a homeowner defaults, the lender wants to ensure they get as much money back as possible first without any regard to the second lienholder.”
Secondary lien: If a homeowner already took out a mortgage to be recorded against the property to buy the house, they already have some equity and may wish to borrow against that equity from the same or a different lender, Donaldson explains.
“In order to get that home equity line of credit, that lender would have a lien in the second position or a second priority lien,” according to Donaldson.
The government has the power to record tax liens on properties where the homeowners owe back taxes. To remove the lien, the property owner will need to satisfy the debt and/or can enlist the help of a real estate attorney to either negotiate or dispute the lien.
Tax liens often take priority over all other liens, including primary mortgage liens. This is part of the rationale behind most mortgage lenders including property taxes in mortgage payment schedules, and pay taxes on behalf of the borrower through an escrow account – it helps mitigate risk and protect the lenders’ interest in the property.
The federal government also has the power to file IRS liens against property owners who fail to pay back income taxes on money they’ve earned. When IRS liens remain unpaid, the federal government can foreclose on a property to collect the debt. It’s also important to note that state and local governments may also file tax liens for nonpayment of state or local levies and taxes.
Judgment liens, or judicial liens, are recorded against real estate when a judge issues a judgment against a property owner who loses a lawsuit and court-ordered damages remain unpaid. Selling a house with a judgment lien requires court approval.
Child support and alimony liens
If a property owner fails to pay court-ordered alimony or child support, a lien can be placed against the property. The judge may allow the owner to sell the home, however court approval can take a long time, reports Helali.
Homeowner associations can record liens for unpaid dues and outstanding fines. HOA’s may initiate foreclosure even when mortgage payments are current, if the state and the association covenants, conditions, and restrictions allow it.
A mechanics lien, also known as a construction lien, can be recorded against a property for unpaid construction work after 90 days. Like other liens, mechanics liens can cloud a title making it difficult to sell a property. Liens that fall under the broader category of mechanics liens include:
- Materialman’s or supplier’s liens: for contractors that supply materials for construction or home improvement projects
- Designer liens: recorded by engineers, architects, and other designers when services remain unpaid
7 steps to selling a house with a lien
“If you can’t afford to pay the debt right away, your agent may negotiate to wrap the cost of [the lien] into your closing costs—but plan to deduct the expense from your home sale proceeds.”
Property liens can be removed by paying the debt in full, or by negotiating with creditors to accept a lower payoff. Consider the following steps when selling a house with a lien.
1. Pay the lien upfront: If you have the means to pay the debt, making the payment will clear your title.
2. Negotiate the debt: When you don’t have enough equity in a property, for example, you owe $70,000 but you only have $60,000 equity in your home, consider hiring an attorney to negotiate the debt to a lower payoff amount.
3. Dispute the lien: You can hire an attorney to dispute a lien that you’ve already paid, or believe is a higher amount than what you actually owe.
4. Get a payoff letter from creditors: After you’ve confirmed, negotiated, or disputed the debt, ask the creditor for a payoff letter of what you owe. Then provide it to your escrow agent if you’re working the debt into the sale settlement.
5. Use the sale proceeds to pay the lien: One of the easiest ways to pay a property lien is to work the debt into the sale proceeds. Ask your creditor for a payoff letter and your escrow agent will do the rest.
For an estimate of the amount of money that you’ll walk away with from the sale, use HomeLight’s Home Value Estimator. By answering seven simple questions, you’ll get a ballpark estimate of what your home is worth on the current market in minutes.
6. Sell a house with a lien for cash: In certain circumstances, depending on local law and regulations, a property owner may sell a house for cash with a lien still encumbering the property. However, even under circumstances where this is allowable, the lien will remain with the property; and if the new owner wants a clear title or financing in the future, they’ll need to address and potentially satisfy the lien. A better option is to pay the lien through the proceeds of the sale. If you want to sell your house for cash, consider HomeLight’s Simple Sale platform to:
- Receive a competitive cash offer
- Sell your home in as few as 10 days
- Sell your house “as-is” with no repairs or agent fees required
7. Obtain a lien release: Once you pay the debt, the lienholder is obligated to provide you with a recorded document called a lien release stating the debt is paid and the lien is removed. The document is sometimes known as a “satisfaction of mortgage”, a lien discharge, or lien termination. Make sure to get that document.
5 ways to prevent title issues and closing delays
1. Conduct a title search: According to the National Association of Realtors®, unclear titles account for 11% of closing delays; therefore, always perform a title search to uncover lien issues before a buyer does. Since liens are public record, they’re easy to locate in the following three ways:
- Ask the title company to order a title search for your property.
- Visit the county recorder website and input the name and address of your property.
- Visit the county recorder’s office in person and ask the clerk for assistance with your title search.
2. Pay your mortgage, taxes, contractors, and bills on time.
3. Inform your real estate agent if your property has a lien.
4. Arrange a payment plan with creditors immediately when you’re behind on payments or discover a lien on your property.
5. When hiring contractors, ask for proof that they’ve paid their subcontractors, suppliers, and laborers, then get a release of lien from all.
Navigate the route to a smooth closing
A knowledgeable agent is your ally, so make sure to keep them in the loop every step of the sale.
“Sellers should always be upfront and forthcoming with their agents because they’ll make the transaction easier,” Helali says.
Header Image Source: (Jira/ Rawpixel)