Buying a foreclosed home is often a way to get a lot of house for not a lot of money. The cost savings of purchasing a foreclosed home can be impressive. However, a few potential downsides exist. One of the downsides of purchasing a foreclosed home is the risk of purchasing a home and later discovering liens that you’ll be responsible for settling.
What is a Lien and How Does It Work
Established legal rights against assets used as collateral to satisfy a debt are liens. They are possessory and non-possessory. When assets are used as collateral but not physically possessed by the lender, the lender can still hold lawfully recognized and protected rights to the property.
This is a non-possessory lien. Creditor agreements and legal judgments create liens. Liens ensure their principal obligation is satisfied, such as the repayment of a loan. A creditor holding a lien to your loan may seize assets subject to the lien. The loan and creditor’s rights to your assets are released once the loan is repaid.
Types of Liens
When considering “does foreclosure clear all liens?”, first know what type of liens the property is subject to. The type of lien determines how liens are distributed after foreclosure.
Mortgage Lien
A mortgage lien is a legal right to seize and sell assets subject to an unpaid mortgage obligation. Mortgage liens exist when the bank places a lien on homes until the mortgage is paid. The home is collateral for the mortgage. Failure to pay mortgages results in the bank exercising its right to seize and sell homes to collect an outstanding debt.
Mechanic’s Lien
Mechanic’s liens are legal documents that reserve the rights of filers to recover unpaid compensation. Several service providers have the choice to execute a lien to secure payment. Contractors may go to court and get a judgment against a debtor who doesn’t pay them. Debtor’s property will be auctioned to pay the contractors.
Properly placed, filed, and served mechanic’s liens stay with property no matter who owns the property later. This prevents the property owner from selling the property or borrowing extra money against the property without resolving the underlying claim. In an attempt to limit the spread of the coronavirus, New York City’s Governor Cuomo issued an executive order, “New York State on PAUSE.” All non-essential businesses suspended in-office personnel functions, and tolling filing until April 19, 2020.
On March 20th, executive order 202.8, tolled certain statute of limitations. Executive order 202.8 didn’t specifically reference time constraints in lien law, however, the broad language suggests tolling extension of mechanic’s liens. Nevertheless, tolling may not be sufficient to protect a contractor’s rights. Before a mechanic’s lien can be filed, the contractor could lose its mechanic’s lien priority or the subject property may be sold.
Tax Liens
Statutory liens are created by law. Tax liens are found whenever a law enables authorities to execute liens on property of delinquent taxpayers. Do property tax liens remain after foreclosure? You must consider federal and state taxes.
When a property owner owes back income taxes, federal tax liens arise giving the IRS the right to foreclose the property. Whether federal tax liens are wiped out by foreclosure depends on whether the IRS takes your property or collects via personal or financial assets. So, are federal tax liens wiped out by foreclosure? Not always. To exercise lien rights, the IRS must record a Notice of a Federal Tax Lien. A mortgage lender who records its lien before the IRS records a Notice of a Federal Tax Lien takes priority. If there is not enough equity in the property for the IRS to recover its debt, the IRS lien will remain.
According to the New York City Department of Finance, unpaid charges against property become tax liens that may be sold in a tax lien sale.
Each year, the Department of Finance sells tax liens. Unpaid debt that qualifies for a lien sale will be sold to an authorized buyer. A lien servicing company, on behalf of the buyer, adds fees and interest to your account, so it’s better to pay your debt before the state sells the lien. At least four notices of the sale will be sent before your lien is sold
Mayor Bill de Blasio announced the last day to pay and remove properties from the tax lien sale at-risk pool has been postponed until January 1, 2021, along with an executive order prohibiting any sales of tax liens during this time. Customers who received a lien sale warning notice should pay online or enter a payment agreement to avoid being included in the sale.
Municipal Lien
A lien filed by a municipal corporation against a property owner for the owner’s proportional share of a public improvement that specifically and individually benefits the owner is a municipal lien. This includes sewage disposal and the supply of water, utilities, cable, and tv. These liens are usually implemented in the same manner as unpaid taxes.
Judgment Lien
Judgment liens are placed on assets by courts through legal proceedings. If the debtor fails to satisfy their obligations, the creditor receives the right to take possession of the debtor’s property. Creditors may liquidate the assets of the debtor to recover payment. Judgment liens are attached to property without the owner’s consent; thus, they are non-consensual. They attach to real property, personal property, or even, future acquisitions.
Which Liens Get Paid First in Foreclosure
How is Lien Priority Determined
Creditors should consider rules regarding liens. Lien priority determines whether a debt is recovered. A consultation with the Law Office of Yuriy Moshes, P.C. can help you ascertain this.
Recording date dictates lien priority at a “first in time, first in right” standard. The government always gets paid first. Following the government, the original mortgage or “senior liens” are paid. Mechanics liens and/or second mortgages are next, but this order may vary from state to state. Judgment liens are subordinate to first mortgages and sometimes second mortgages. Judgment liens are also subordinate to other previously filed judgment liens.
Senior Liens
Senior liens are the primary security interest placed upon property before subordinate liens. They’re paid before other liens. Mortgage lenders are considered to be a senior lienholder.
Junior Liens
Junior liens are assigned to a property after a previous lien has been created and recorded. Junior liens lower priority than different liens on the same property. Home equity loan lenders are junior lienholders. If contractors or the IRS execute a lien against your property, they’re junior lienholders.
What Happens To Junior Liens In Foreclosure
When the first-mortgage lender forecloses, remaining funds from the foreclosure sale will be allocated to junior lien holders. Junior liens are extinguished if the foreclosure price is insufficient to satisfy debts to senior lien holders. Thus, junior lien holders risk not recovering debt.
What Liens Are Extinguished by Foreclosure
If the senior lienholders’ debts aren’t paid from the foreclosure sale, junior liens are extinguished. Even if the junior lienholder launched the foreclosure junior liens will still be extinguished.
How to Investigate Liens on Property After Foreclosure
Conduct a title search to uncover what other liens or obligations you may be subject to regarding a foreclosed property. Title companies or real estate attorneys can search the chain of title for properties. Since liens are a matter of public record, you can search the county recorder’s office file to find liens on the property yourself.
Local Municipal Records
Title insurance policies usually don’t reveal unrecorded debt. Municipal Lien Searches uncover this and other issues title searches miss. Code violations filled as an official lien or unpaid utility bills that aren’t recorded won’t be revealed by a title search. Protect yourself by performing a municipal lien search before closing. You can require a municipal lien search be performed as a part of your closing contract or perform the search yourself.
Get Legal Advice about Liens After Foreclosure
These real estate transactions are tough. This quick read cannot replace the help of a licensed professional. A real estate attorney can answer questions and help you come up with the best solutions. The Law Office of Yuriy Moshes, P.C., has a team of experienced attorneys to help buyers find the best options when faced with lien transactions. Submit a free consultation form to become one of our many happy and satisfied clients.