Acquiring the home of your dreams is an exhilarating experience, but this joy can turn into dismay when the specter of foreclosure looms six years later due to seemingly minor oversights, such as unpaid taxes.
A homeowner in D.C. found themselves ensnared in this predicament, a consequence of a municipal recording delay that a standard title search failed to uncover. Had they opted for a municipal lien search, the issue might have surfaced before the property’s closing.
Title searches and municipal lien searches offer crucial insights to sidestep unexpected liens in the homebuying process. However, it’s equally important to comprehend the nature of a lien, when it comes into existence, and its implications for both homebuyers and homeowners.
Defining and Understanding Property Liens
A lien is a legal interest or claim on a property or possession, serving as collateral to secure the repayment of a debt. Acting as a protective layer for creditors, service providers, or lenders, liens offer a means of legal recourse if necessary.
Differentiating Liens By Category
Not all liens are the same, and it’s important to break them down by the various categories they fall under: general liens, and specific liens or voluntary and involuntary liens. The list is extensive for how liens are defined.
General Liens
A general lien applies to all of an individual’s assets, such as property, land, vehicles, or other valuable items. Creditors can claim one or more assets to cover outstanding debts. An example of this would be someone not paying their federal taxes and the government seizing all their assets as collateral.
Specific Liens
Specific liens are tied to a particular asset, commonly a home or car, as these items are often financed. For example, if someone defaulted on their car payments, a specific lien could be placed on the vehicle as collateral.
Voluntary Liens
Voluntary liens are placed on assets with the borrower’s full knowledge. In cases like mortgages, it acts as collateral for the lender. When a homeowner takes out a mortgage, they are fully aware of this risk.
Missed payments on loans for items like cars, boats, or RVs may result in repossession or liens if the asset’s value doesn’t cover outstanding payments.
Involuntary (Non-Consensual) Liens
Involuntary liens are more perilous as borrowers might be unaware of their existence. Creditors can obtain liens without the borrower’s agreement.
Involuntary liens can be created through court action (judicial lien) or preexisting statutory laws (statutory lien).
Various Types of Statutory Liens
Tax Liens
Local, state, and federal laws permit liens to be placed on a property for unpaid taxes. Liens at the federal level are general and link to all of the person’s assets.
Homeowners failing to pay property taxes may face a lien, potentially leading to foreclosure.
Mechanic’s Liens
These liens arise when payment is not made for work or supplies in a home improvement job. Regardless of who hired the contractor, the homeowner is considered the beneficiary, and these liens attach to the property.
HOA or COA Liens
Homeowner’s Association (HOA) or Condominium Owners Association (COA) liens result from outstanding dues or fines for community services. HOAs may threaten a lien and foreclosure for rule violations, even seemingly arbitrary ones.
Judicial Liens
Created as a result of a court proceeding or missed payments from a previous court order. Includes judgment liens, child support liens, and others imposed through legal actions.
How Creditors Recoup Their Losses
Creditors seek to recoup owed money, and the process depends on the lien type, state laws, and previous collection attempts. Before placing a lien, creditors might attempt to collect the debt. These attempts could precede home ownership, making the buyer unaware of the impending lien.
If debt settlement attempts fail, the creditor records the lien, a process that may face delays in municipal offices.
Expiration and Extinguishing Liens
While some liens expire, many do not. If not extinguished, they remain attached to a property even after foreclosure or repossession.
Liens can be extinguished by paying off the debt, appealing or disputing the lien, negotiating a settlement, or waiting for the statute of limitations in the case of judicial liens.
Challenging or Contesting the Lien
While disputing a lien is no simple feat, it remains an avenue through legal channels. Successfully appealing a lienholder’s claim involves demonstrating either the invalidity of presented evidence or their failure to adhere to state-specific requirements.
Negotiating a Settlement
Certain creditors may be open to negotiation, offering a chance to settle for a reduced amount or establishing a feasible payment arrangement.
Statute of Limitations
For judicial liens, debtors can wait for the lien to expire, potentially avoiding payment. However, it’s essential to note that creditors may have the option to file a lawsuit again.
Settling the Lien
Assuming responsibility for the lien means you can request a payoff letter to clear the debts. Once payment is complete, providing evidence to the local recorder or recording jurisdiction’s office allows for the release of the lien.
Securing Your Investment
Streamlining the homebuying process, along with property ownership, becomes more manageable when proactive research is conducted. Professionals like title agents can conduct thorough title searches, but it’s wise for homebuyers to understand various lien types. Although title agents play a pivotal role in performing thorough title searches, gaining insights into various lien types impacting homebuyers and homeowners adds an extra layer of awareness to your real estate journey.
Consider a municipal lien search, especially when moving into an HOA, to avoid potential surprises. Title insurance is crucial when proper searches are conducted beforehand, ensuring homeowners are protected against unforeseen issues. Incorporating a municipal lien search and maintaining awareness of various liens ensures a secure and prolonged ownership of your home. Taking these measures and understanding the process will help safeguard your investment in the future.