Can A House Be Sold With A Lien On It?

by | Jan 4, 2024

You’re here because you want to know if a house can be sold with a lien. We’ll start this article by giving you the answer. Then, we’ll give advice for both sellers and buyers. How would you like to walk away from this article with the knowledge to make an informed decision?

The Answer

You can legally sell a house with an active lien, like a mortgage, if it’s a voluntary lien. You can also legally sell a home with an involuntary lien like a tax, judgment, or contractor’s lien. However, one of three things must happen to complete the sale.

  1. The escrow company subtracts the money owed to the debtors from the seller’s proceeds to pay off any outstanding liens. 
  2. If the sale proceeds can’t fully pay off the lien, the seller must pay off the lien out of pocket.
  3. If the seller can’t or won’t pay off the lien, and the buyer still wants the property, they’ll assume responsibility for it.

Lender’s title insurance is required if you use a mortgage to buy a home. Without title insurance, you’ll need to buy the house without financing, through a cash sale.

How Does A Property Lein Work?

A lien is a legal claim or right against a property by a creditor. Creditors use liens to ensure they receive the money they are owed. If the property owner does not pay their debts, a judgment may allow the creditor to seize the property, sell it, and use the proceeds to pay off the debt.

Liens are public records, telling other potential creditors that due to existing claims to the property, they won’t be first in line to get repaid. As a result, it’ll make it challenging to sell the property or secure other forms of financing for a car or business loan.

Things usually happen in this order during the home sale process.

  1. The buyer makes a formal offer.
  2. The seller agrees and sends a purchase agreement.
  3. The buyer signs and makes an earnest money deposit.
  4. The escrow/title company collects escrow and runs a title search.

The house title shows ownership records of the property, who’s owned it, and any liens on it. The title company needs to clear the title for you to sell the home.

This leads us to our first step, determining the type of lien on the property.
 

Types Of Property Leins

  • IRS Tax Lien: A legal claim by the U.S. government against a taxpayer’s property, including real estate, personal property, and financial assets, due to unpaid taxes. It ensures the government’s priority to collect unpaid taxes.
  • Property Tax Lien: This lien is similar to an IRS tax lien, but it addresses property taxes levied by the county.
  • A Judgment Lien: A legal claim on a debtor’s property, granted to a creditor when they win a lawsuit for unpaid debts. This lien secures the creditor’s right to compensation if the property is sold or refinanced. It typically remains until the debt is paid or the lien expires.
  • HOA Lien: A legal claim on a property by a homeowners’ association (HOA) for unpaid association dues, assessments, or fines. It gives the HOA legal rights to the property if the homeowner fails to pay their dues, potentially leading to foreclosure to recover the owed amount.
  • Mechanic’s Lien: A security interest in the title to property for the benefit of those who have supplied labor or materials that improve the property. It’s typically used by contractors, subcontractors, and suppliers, and it ensures payment for their work or supplies if the property owner defaults.
  • Mortgage Lien: As we discussed, a mortgage lien gives the lender a claim to a property until a debt is paid. Unlike the other six liens on this list, a mortgage lien is voluntary.

Advice To Sellers: It’s in your best interest to find out about any liens on your property before selling. Some buyers will lose interest if public records uncover an active lien on the property that will slow down the sale process.

What To Do About The Lien?

If there’s a lien on your property, you have a few options to release the lien and sell your property.

  • Pay it off: If the lien is valid, you should pay what you owe and extinguish the lien. After paying off the balance of your debt in full, the creditor will file a release-of-lien form. Your escrow agent can work the debt into the sale settlement.
  • Dispute it: A lien may be filed against you in error or in malice. You can dispute a lien at your county recorder or Secretary of State office. They will release the lien and notify the major credit bureaus if it was filed in error.
  • Get a release: If you already paid off the debt, you may need to submit a copy of the lien release to prove that the lien has been satisfied. 
  • File a title insurance claim: Your title insurer may reimburse you or your lender for covered losses for liens arising before your ownership that were not found in the initial title search.
  • Let it expire: Some states have a statute of limitations for property liens. For example, California is ten years while Massachusetts is twenty years. If the claimant doesn’t remove the invalid lien, you can petition the court for a decree to release the lien. You may want to contact an attorney and/or title company.
  • Negotiate the debt: If you don’t have enough equity in the property to pay off your debt fully, you could consider hiring an attorney to help you negotiate the debt to a lower amount.

Advice For Buyers: Work With A Professional Title Company

If you’re a buyer reading this article, here’s your key takeaway.

The title company should deal with all of the liens, from conducting a title search after you sign the purchase agreement to paying off the lien after the sale.

If you’re working with a real estate agent, make it very clear to them that you don’t want to buy a property with a lien. You can get into a game of cat and mouse with sellers who can’t pay off the lien but still want you to buy their property. Ensure you get your earnest money deposit back in writing if the deal falls through.

One More Option: Sell To A Real Estate Investor

You’re probably thinking, “Oh man, here comes the sales pitch.”

Many homebuyers don’t want to work with a seller with a lien on their property. You could spend months or years trying to sell a property. All the while, you’re falling into more debt, paying more taxes, etc.

Many homeowners drag their feet until they end up in a situation where they need to sell their home fast. A real estate investor could make you an attractive offer that foregoes you having to pay off your lien or even do a title search (which could take weeks).

If you’re interested in selling your house for cash, we wrote a blog on the complete process.

Pro Tip: Attend the inspection to ensure the inspector does a thorough job. It should last 2-3 hours. Tell the inspector your plans for the property (move-in ready vs. fixer-upper) and read the full report. 

Massachusetts-Specific Home Requirements

  • Title 5 Inspection: Massachusetts requires a Title 5 inspection for properties with private septic systems. This inspection ensures the septic system meets state environmental standards and must be done before selling a property, expanding its footprint, or building additional bedrooms.
  • Lead Paint Law: Massachusetts requires homes built before 1978 to be inspected for lead paint. If lead is found, it must be disclosed, and landlords must remove or cover lead paint hazards if a child under six resides in the property.
  • Smoke & Carbon Monoxide Detector: Before a property can be sold, it must pass an inspection to ensure compliance with Massachusetts’ smoke and carbon monoxide detector regulations. Certificates from local fire departments are required at closing.
  • Transfer Tax (Stamp Tax): Massachusetts imposes a real estate transfer tax on property sales, commonly known as a stamp tax. The tax rate is $2.28 per $500 of the purchase price, paid by the seller at closing.

Step 8: Homeowners Insurance

Homeowners insurance is mandatory if you have a mortgage and must be in place before closing. This insurance covers various risks, including damage from fire, theft, and natural disasters, as well as liability for accidents on your property.

Standard policies often include dwelling coverage, personal property coverage, liability protection, and additional living expenses if your home becomes uninhabitable.

There are different levels of coverage, such as:

  • HO-1: Basic policy covering specific perils.
  • HO-2: Broad policy covering more perils than HO-1.
  • HO-3: Special policy that covers all perils except those explicitly excluded.
  • HO-5: Comprehensive policy offering the most extensive coverage.
  • HO-6: Condo insurance.
  • HO-7: Mobile home insurance.
  • HO-8: Older home insurance.

By comparing different policies and providers, you can ensure you get the best protection for your new home.

Step 9: Closing And Walkthrough

The final walk-through typically occurs on the closing day to ensure the property is in the agreed-upon condition. During this inspection, confirm that all personal items have been removed unless specified otherwise in the contract, and check for any new damages. Conduct the walk-through during daylight hours for better visibility. 

Be thorough:

  • Flip all switches
  • Turn on faucets to check for leaks
  • Run all appliances
  • Test the garage door opener
  • Open and close all doors
  • Flush toilets
  • Run the garbage disposal and exhaust fans
  • Inspect ceilings, walls, and floors.
  • Test the heating and air conditioning systems.

At The Closing Table

You will review your Closing Disclosure form at closing, which you should receive three business days before closing. Compare it with your Loan Estimate to check for major changes or inconsistencies. Some fees are legally restricted from increasing by more than 10%.

Consider having a real estate attorney review these documents if desired.

On closing day, meet at the title company. Being on time is crucial, as appointments are often scheduled back-to-back. Bring your photo ID, a cashier’s check (if required), Closing Disclosure, and any other requested documents. 

During the closing, you will sign several key documents:

  • Closing Disclosure: Details all the costs and fees associated with your mortgage, received at least three business days before closing for review and comparison with your Loan Estimate.
  • Promissory Note: A legal document where you agree to repay the loan amount over a specified period, including the interest rate and payment schedule; your promise to pay back the loan.
  • Mortgage (or Deed of Trust): Secures the promissory note and gives the lender a claim against your home if you default on the loan; outlines the mortgage terms, including the loan amount, interest rate, and repayment terms.
  • Deed: Transfers property ownership from the seller to you; includes a property description and is signed by the seller.
  • Settlement Statement (HUD-1 or ALTA): Provides a detailed list of all costs associated with the home’s sale, including buyer and seller costs; reviewed and signed by both parties.
  • Affidavits: Various affidavits may be required, such as confirming your identity, stating the property will be your primary residence, or ensuring no undisclosed liens or judgments.
  • Title Documents: Ensure you receive clear title to the property; may include documents related to title insurance, which protects you and the lender against potential legal issues with the property’s title.
  • Initial Escrow Disclosure: This document outlines the escrow account details, including the amount you need to deposit and what it will cover (e.g., property taxes and insurance).
  • Loan Application: Review and sign a final version of your loan application to confirm that all information is accurate and up to date.
  • IRS Form W-9: Used to provide your taxpayer identification number to the lender for reporting interest paid on the mortgage.
  • Homeowners Insurance Verification: Proof that you have secured homeowners insurance for the property, typically required by the lender.

Get One-on-One Guidance

Contact us below or call (978) 228-1068 to speak with us about selling your home fast.

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Elie Deglaoui - Author

Author

Elie Deglaoui

Elie is our office admin who handles all our day-to-day tasks and makes sure we always stay on track. He brings his love of music and sports into the office everyday to always liven up the environment. His outgoing personality makes it easy and fun for him to talk to homeowners, homebuyers, and everyone in between.

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