What is a lien? Here’s what you need to know

If you’ve ever tried to buy or sell a home, you may be familiar with property liens—which are attached to a mortgage. But liens can be placed on other types of property as well, including cars or even work done on your home.

So what is a lien? And how do you get rid of one? Here’s a breakdown of how liens work.

Key takeaways

• A lien is a legal claim against personal property by a lender to satisfy a debt.
• Liens can be voluntary or involuntary. 
• Liens can make it harder to borrow money.

A lien is a legal right or claim against any type of property that can be used as collateral to ensure the repayment of a debt. Liens give the creditor the right to sell the borrower’s property if they fail to repay the debt they owe.

Most liens are voluntary liens—or consensual liens—meaning both the borrower and the creditor enter into the agreement willingly. But there are also involuntary liens, which occur without the borrower’s consent. These are typically the result of a legal disagreement. For example, if you have unpaid taxes, the IRS may file a federal tax lien against your property.

There are many different types of liens. Here are four common types:

Property liens, which include mortgage liens, are the type of lien many people are familiar with. When you take out a loan to buy a house, you agree to offer up the home as collateral. In the event that you can’t pay back the loan, the lender may sell your home in order to recover their losses.

A lien will show up in a property title search. If you are trying to sell your home, you’ll need to settle the dispute with the lienholder—in this case, the mortgage lender—to clear the title and proceed with the sale.

As its name suggests, a judgment lien is a lien that’s placed as part of a court judgment. For example, if a lender sues a borrower for nonpayment on a debt, the court may put a lien on the borrower’s property. 

A judgment lien is one type of involuntary, or nonconsensual, lien.

If someone fails to pay income tax, property tax or any other type of state or local tax, the government can put a lien on their property. This might include real estate or other financial assets.

Tax liens typically take priority over other types of liens. For example, if you sell your home, the money must first go to pay off a tax lien before you can apply any remaining balance to a mortgage lien.

A mechanic’s lien, sometimes called a construction lien, can be put in place if a property owner fails to pay a contractor or subcontractor for work done on their home. Mechanic’s liens differ from other types of involuntary liens in that the lien may only be placed against the property the work was done on. It can’t apply to the homeowner’s other assets or real estate.

Here’s how liens work, using mortgage liens as an example.

When you get a mortgage to purchase a home, the lender might put a mortgage lien on your home. This lien is voluntary and gives the lender the right to take back the home if you default on your payments.

If you can’t make your mortgage payment, the mortgage lender could foreclose on your home and collect the outstanding debt through the sale of the property. 

In the case of a mortgage lien, the sale of the home may not be enough to cover the outstanding debt attached to the lien. In this case, the lender may be able to transfer the lien to another property or asset owned by the borrower.

Typically, the only way to remove a lien is to pay the debt that’s attached to it. In the example given above, that would either be by paying off the mortgage entirely or allowing the home to be sold in foreclosure. 

In cases where the lien is placed unlawfully or the lender and borrower disagree on whether the repayment has been completed, a lien may be removed in court.

But it’s important to remember that eliminating a lien doesn’t necessarily mean the debt is eliminated too. While liens don’t show up on your credit report, not paying debt can negatively affect your credit scores. And that could make it harder to qualify for loans and credit in the future.

Liens are a legal tool that creditors use to secure their investment. While it’s common to have a lien as part of a home loan or auto loan, failing to pay the debt attached to the lien can have consequences on your personal finances. It may also make it hard for you to sell your property or take out additional loans in the future.

If you’re interested in learning more about how your credit can be affected by late payments, check out our guide to derogatory marks on your credit report.