What Happens if You Have a Lien on Someone's House & It Goes Back to the Bank?

Forecosure may elimate other legal claims to a house.

When a homeowner accepts a mortgage loan to purchase a house, the homeowner grants a lien on the house to the mortgage lender, which is often a bank. That way, if the homeowner defaults in repaying the mortgage loan, the mortgage lender has recourse against the home. The mortgage lender can take the home back through a foreclosure process. Sometimes, this process can result in the elimination of all the other liens on the property, but not always. If you have a lien on someone's house and it goes back to the lending bank in foreclosure, you will have to examine the public title records to evaluate what happens to your lien.

Foreclosure

Foreclosure is a legal process the mortgage lender follows in order to take title to a home when the homeowner fails to pay the mortgage loan. Foreclosure results in an auction where the lender sells the property to the highest bidder. Most of the time, the mortgage lender is the person or business entity that takes title to the home if nobody else shows up at the foreclosure auction to bid on the house. The mortgage lender generally bids whatever amount is due and owing on the mortgage loan, and if nobody else bids a higher amount, the bank takes back title to the property.

Priority

When a foreclosure occurs, each person holding a lien on the property must examine whether foreclosure eliminates that lien. State laws determine priority among various liens, so the details can vary depending where you live, but in general, the first lien to attach to property is the lien with priority. A senior lien is a lien with priority over other liens, while a junior lien is a lien without priority.

Senior Lien

If you have a lien that is senior to the bank's mortgage lien, then your lien will remain attached to the house even after the bank's foreclosure sale. In fact, in some states, the bank will have to pay off your senior lien as a part of the foreclosure proceedings. The rules can vary depending on the laws of the state in which you live.

Junior Lien

When the bank forecloses on the house and you have a lien that is junior to the bank's lien, the foreclosure results in the elimination of your lien. Foreclosure on a bank's senior mortgage lien always eliminates junior liens. Also, because the bank took the house back, you will not receive any payment on your lien. In some foreclosures where people actually show up and bid on the property, you may receive payment on your lien if the foreclosure sales price is high enough to pay off the mortgage lien and other liens. Banks, though, generally only take the house back when nobody shows up to bid, which means there won't be any sales proceeds to pay down your lien.

References

• "Essentials of Practical Real Estate Law"; Daniel F. Hinkel; 2011)