Liens on Foreclosed Homes and Property
Liens on Foreclosed Homes
If you are new to investing in real estate foreclosures, you may be concerned about liens on the foreclosed homes you are thinking about purchasing. The effect a lien will have on your purchase depends on the type of lien that is on the property.
There are many different types of liens. The ones people are usually most familiar with are mortgages. Besides first and second mortgages, a property can have mechanic's liens, property tax liens, liens for water or other utility bills or IRS liens.
Most liens are wiped out by foreclosure process, but some remain. If you are purchasing a foreclosure property that has liens on it, it is important to know which liens you will have to deal with after the purchase.
Foreclosure of First Mortgage
If the property you are purchasing has been foreclosed on by the first mortgage holder, then that lien has already been satisfied. If the borrower owed more than the lender got from the sale of the property, the lender may be able to go after the borrower for the difference depending on the foreclosure laws in the state. However, the lender has no further claim on the property itself.
The foreclosure process also wipes out junior mortgage liens. Junior liens are liens that were recorded after the first mortgage. Liens are usually given priority in the order they are recorded. If there is a second or even third mortgage against the property when the first mortgage holder forecloses, those liens are eliminated as a result of the foreclosure.
Foreclosures by Junior Lien Holders
If the home was foreclosed to satisfy a junior lien, the first mortgage and any other liens that are superior to the lien for which the property was foreclosed will remain against the property and must be paid off by the new buyer. Any liens that were recorded prior to the lien that is being foreclosed are considered superior.
Other liens that may be wiped out by the foreclosure process are municipal liens and mechanic's liens. These liens are placed against the property if city utilities such as water and sewer charges or unpaid, or for work that was done on the property by a contractor but never paid for. In most cases, these liens are also elimated when the house goes through foreclosure. However, munical liens for special assessments such as road work may not be elimated. In the case of mechanic's liens, the date used to establish priority may be the date that work was begun rather than the recording date.
Property tax liens are never eliminated by foreclosure. They are always given first priority. In some cases, liens for state taxes may also receive special treatment rather than being taken in order of filing. Some states give special consideration to liens filed by condominium associations as well, allowing them a superior status even if they were filed later.
IRS liens are treated the same way as other liens during the foreclosure process. They are wiped out if they are junior to the lien that foreclosed. However, the IRS gets a 120-day redemption period. During this time, if the IRS thinks it can sell the house for enough money to cover some or all of the taxes due, it can buy the house back from the purchaser. Keep in mind that if the IRS chooses to redeem the home, you will not be paid for any improvements that have been made to the property since the purchase.
Lawyers and Title Insurance
If there are liens against the property you are purchasing and you are not sure how they will be handled, you should contact a lawyer who deals in real estate law for assistance. Another option is to purchase title insurance when you buy the property. The title insurance company will do a title search and provide a list of encumbrances against the property. Any existing liens that are not listed in the documents provided by the title insurance company will be covered by the insurance.
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