What Happens to Liens in a Foreclosure?
When someone has a mortgage the loan is secured with a lien. A lien means a home is being pledged as collateral for a loan. Any creditor that has a lien on a property has a security interest in that property. If the owner does not pay a mortgage, the creditor can foreclose. When a home goes through foreclosure for non-payment, it will be sold at a sheriff's auction to the highest bidder. There are a few scenarios that can transpire regarding the liens. Sometimes liens can be paid off from the proceeds of the sheriff's sales.
Other People Are Reading
-
LIen Priority
-
When a mortgage document is sent to the county courthouse, it is filed, indexed and documented so that it can be found in the public record. This is called perfecting the lien. The date of filing establishes the order of the lien. The first lien to be filed with the court has the first position. The next lien to be filed has the second position and so on and so forth.
If you have a home selling at a sheriff's sale for $150,000 and the first mortgage holder is Bank of America, which has a mortgage of $100,000, and Chase Bank has a second mortgage for $75,000, both mortgages will not get paid. Bank of America will receive payment in full because it is in first position (the mortgage was filed first) and Chase Bank will receive $50,000. The borrower will still owe Chase Bank $25,000, but Chase will have to pursue the money using other means such as legal action. If Bank of America initiated foreclosure, Chase Bank would have to petition the court to get paid.
First Mortgage
-
When you first purchase your home, the creditor you use for financing is the first mortgage holder. If the first mortgage holder starts foreclosure activity, the rest of the liens are canceled, which means the debts still exist but they are no longer liens on the property. The first mortgage holder gets paid out of the proceeds. If any of the other lien holders want to get paid, they must petition the court for the money, assuming there is enough money remaining to pay them off.
-
Junior Liens
-
If you have a lien holder in third position it means two other lien holders have earlier filing dates for their mortgage with the county courthouse. A foreclosure can also be initiated by a lien holder in any of the positions. In a case such as this, if the lien holder in third position starts foreclosure activities, the lien holders in fourth and fifth position would be wiped out, but the lien holders above the third position would still remain on the property. They would still have a secured interest in the property. Whenever a lien holder starts foreclosure activities, all other liens below it will be canceled.
Balances
-
When a lien is canceled, the lender must try to collect the balance using different methods. Since it no longer has a security interest in the property, it is unable to foreclose. Legal action could be a possibility.
Filing Date
-
The date a lien or mortgage is filed with the county courthouse will determine its placement. The first mortgage is always in first position. The only exception to this is when you have an IRS tax lien, state income tax liens or property tax liens, because they all have priority over a first mortgage regardless of when they were filed.
Purchase/Resale
-
Another option for the lien holder in second position is to purchase the home at the sheriff sale for enough to cover the first mortgage holder. The home can then be sold for enough to cover the first mortgage holder and the second mortgage would be cleared as well from the proceeds. There is usually a shortage of equity in a foreclosure, however, so this scenario does not take place often.
-
References
More Like This
Comments
-
The Mortgage Insider you list as a reference has bad information. An IRS tax lien does not jump ahead of other liens. It is treated just like other junior liens - date of recording used as payment priority. IRS has redemption rights, whereas other Junior Lien Holders do not.
