Whether you have acquired your first property or your tenth, you likely have some familiarity with the concept of how a mortgage works and how some types of debt use your home as collateral. This means that, in the event that you fail to pay a debt, the other party may claim your home as recompense for the debt left unpaid. Even if you do not face this problem with your own debt responsibilities, your home could still be at risk of liens if you do not carry title insurance to protect you against undisclosed liens being discovered after you move into a home.
What a Property Lien Is
A property lien is, in essence, a legal claim associated with your property. It often indicates that a creditor is owed money and is seeking to collect. This notice is filed against your property. In other words, if you owe money, a lien could be placed on your property in an attempt to get you to pay. If you sell the home, however, the lien (which SHOULD be filed as attaching to the property) goes with it.
This means that if you purchase a property, you could be responsible for paying off the debts of the former owner if you are not careful to ensure that the home does not have any liens on it. This is where title insurance helps. In the event that a formerly unknown or undisclosed lien is discovered on your property, you are protected by the insurance and are not responsible for paying it off.
How Priority Is Determined
When a home is foreclosed, any liens on the house are then paid out to the people who have made the claims. The proceeds from the sale of the home are used to do this. However, in the event of more than one lien being on the property, there is a standard order for who gets paid first. This is called “priority.” Most commonly, liens have priority based upon the order in which they occurred—that is, the first lien recorded against the property (which is typically the mortgage) will be paid first, followed by the others that were acquired over time in the order that they arose.
Mortgage Liens: The Standard
The most common type of lien against a property is a mortgage. Some people do not even realize that their mortgage constitutes a lien. If you fail to properly make your mortgage payments and then your home moves to foreclosure. However, if a previous property owner defaulted on their mortgage, then the required notices and the procedure that the foreclosing lender followed would be placed amongst the land records. The title would be examined, the procedure checked prior to passing the title onto you, the new owner. Buying title insurance would be a good idea to protect against any discrepancies that might arise later.
Taxes and Judgments
Other types of liens are also possible besides mortgages. If you are a party in court who receives a judgment to pay the other party damages, this judgment may be levied in the form of a lien. Similarly, if you fail to pay your property taxes, a lien could be placed on your property. Tax liens are often superior to mortgage liens, meaning that the tax debt would be paid first because it has priority. And let us not forget Federal and State income tax liens which arise if you do not file and/or pay those on time.
Lien Superiority: Contractors
Another type of lien that has high priority is a mechanic’s lien. If you hire a contractor or worker to perform a job at your home, such as redoing your roof or installing a pool, you are required to pay that contractor. If you fail to do so, the contractor can put a lien on your home until they have been compensated for their work. Mechanic’s liens are superior to mortgage liens, which is a way to make sure that the contractor still gets paid for their work even if you default on your mortgage. Their bill would be paid before clearing the outstanding balance on your mortgage.
Trust the Experts to Equip You with Title Insurance to Protect Against Some Liens
Title insurance is a valuable, inexpensive and convenient way to protect yourself from many of the common pitfalls that occur as a result of purchasing a home. You may still be responsible for clearing any liens on the property, even if you were not the reason that they occurred in the first place. A title insurance policy can protect you against liens that are discovered after you purchase a home. The experts at Mathis Title Company would be happy to answer any questions that you may have and help you get started on securing an insurance policy of your own. Reach out to schedule an appointment.