What Are Real Estate Liens?
When you enter into the real estate world, whether you’re buying your first home, refinancing a mortgage, or about to invest in rental property, you’re likely to hear the term “property lien” or “real estate lien.” For those who are new to the industry, or those who may need a brief refresher course, we’ll go over the definition of a property lien and how they can affect different mortgage and real estate scenarios.
Defining a Property Lien
The simplest way to define a real estate lien is to think of it as a guarantee to repay debt. When you take out a mortgage, for example, your lender is loaning you a certain amount of money in order to purchase the home. However, if you sell the home before you repay the loan’s balance, the mortgage acts as a lien and guarantees that the lender will be entitled to their money. Unless you go into foreclosure or your lender approves you for a short sale, you must repay the amount of money your mortgage bank loaned you, plus any interest that has accrued over time.
Another way to think about property liens is to think of them as a legal claim of ownership. This is where it can get a little confusing, since your mortgage company doesn’t actually “own” your home – you do – but, they do have the legal ownership of your mortgage, which uses your home as collateral, so to speak. If you do not pay your mortgage, the loan goes into default and as a result, you may lose your home to the bank.
You may have heard people say that their property is “tied up” in a mortgage. This phrase comes very close to the origin of the word “lien.” Apparently, lien comes from a French word meaning “knot” or “binding.” The word likely became used in the English language around 1066, during the Norman Conquest.
Title Searches & Title Insurance
If your mortgage company has a lien on your home, it basically means that they are claiming legal ownership of any remaining money not paid toward the mortgage. As long as any mortgage on a property is unsatisfied, there is a lien against the home. This is why it’s essential to have a title search conducted before purchasing a home.
The title search is done to make sure there are no existing liens on the home you’re about to buy. And because sometimes the title search can fail to uncover certain issues, title insurance can be bought to protect the homeowner from legal hassles later on down the road.
It can be extremely risky for a real estate buyer to neglect to buy title insurance. Especially if they live in a state that allows liens to be kept private and not published on public records until they are required to be filed. If you have further questions or concerns about real estate liens, don’t hesitate to consult a licensed real estate agent serving your area.
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