Liens and loans and how they affect the home buying process

When you buy a home with a loan from the bank, the bank is going to file a  lien on the house so you cannot sell the house without paying off your debt to the bank. 

For detailed information about liens and loans please see my info below.

 

 

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Liens and Loans

Liens Stay With the House 

When you buy a home and sign the home loan documents, a lien will be created and filed with the County Recorder. The home becomes collateral for the home loan.

The lien restricts you from selling the property to someone else, without first paying off the home loan, taxes, and any other encumbrances.

Liens and Loan Hierarchy

When there is a sale of the house deeds and liens are recorded with the County, and a lien hierarchy is created. 

In most cases, within the lien hierarchy the first mortgage is placed in the First Position. If there is a second mortgage (or HELOC) it is placed in the Second Position. This means that if you sell the house the first mortgage will be paid off first, the 2nd mortgage will be paid off second.

However, if you have tax or property tax liens these liens will automatically be moved to the First Position.  

For example, if you have a first and second mortgage, then have a government tax lien (because you didn’t pay your personal income, business taxes or property taxes)  the lien hierarchy will be as follows:  First Position: Tax Lien  Second Position:  First Mortgage  Third Position:  Second Mortgage.

The government will ALWAYS get their money first!   

If you sell your house and the house cannot generate enough money to pay the tax liens, mortgages and closing costs you will have to pay money out of pocket to cover these debts, or your house could go into foreclosure. 

Transferring the House to a New Owner

Before you can transfer the house to a new owner, all of the liens on the house must be satisfied (paid.)

The new home mortgage loan that the new buyer takes out on the home will hopefully pay all of the encumbrances (existing mortgages, any other liens, commission to sell the house, property taxes, delinquent HOA fees if any, etc.) on your house.

 Paying Out of Pocket

If the new mortgage the buyer takes out will not cover all of the encumbrances on your house you will have to pay the deficit out of pocket before the property can be transferred to the new buyer.

If you cannot pay the deficit out of pocket, the sale of the home will not go through at the time of closing.

You’ll have to resolve the issue by either borrowing the money from someone to pay the deficit, negotiate a short-sale with the lender, continue living in the house and resume making the monthly payments, or let the home go into foreclosure and you may have to file bankruptcy.

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