There are a few different types of liens, each with their own nuances, but in general, a lien means that the lien holder has a right to the property in question. Because liens are placed on property, which are an illiquid type of asset, lien holders have the ability to force the sale of the property to satisfy the debt.
If you owe $5,000 to a lien holder, for example, they can’t just magically make $5,000 in cash appear from the bricks of your home. They can, however, wait until you sell your home and then take $5,000 from the proceeds.
When a property with multiple liens on it is sold, each lien holder typically has a right to the proceeds. Usually, liens will be paid according to when each lien holder recorded their lien; the first person to have recorded their lien will be paid first, and so on. However, other lien types, such as property tax liens, may take priority regardless of when they were recorded.
Lien Example
Let’s look at an example of how a lien typically works:
Say you got a mortgage to purchase your home. You hold title on your home, meaning you’re the legal owner of the property. But because you owe your mortgage lender the money they lent you to buy your house, they’ll put a lien on the property.
As long as you make your monthly mortgage payments, the lien won’t come into play. The lender will remove the lien once you finish paying them off, either at the end of your mortgage term or by using the proceeds from the sale of the home.
However, if you stop making payments on your mortgage, the lender may eventually begin the foreclosure process. During this process, your lender will seize the home and sell it to recoup their losses. The lien allows them to do this.
If you have more than one lien on your property, those lien holders will also be in line to receive some of the proceeds from the sale of the home once your mortgage lender or any other senior lien holders are paid.
