Home liens: preventing and removing them
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If you let a lien on your home linger, be forewarned: You could face foreclosure, or at the least be delayed from selling or refinancing. Here's what you need to know:
WHAT EXACTLY IS A LIEN?
"A lien is a legal recorded claim against your property," says Joseph Laface, chairman of the Real Property Committee of the Nassau County Bar Association. "The claim ties up your property as a way to collect money that you owe." A lien is a red flag that can stop you from selling your home or refinancing without first paying your debt and having the lien removed.
TYPES OF LIENS
The most common type of lien is the lien on property from a primary mortgage. "Whenever you take out a mortgage to finance a property, the bank automatically has a lien on it," says Laface. In short, if you don't pay your mortgage, the bank will eventually enforce the lien, proceed with foreclosure and seize your property if you don't work out your debt.
UNIFORM COMMERCIAL CODE 1 LIEN
It's the standard type of lien placed on co-op owners. Like a home lien, the UCC 1 Lien can lead to foreclosure if you don't pay your mortgage, Laface says.
Home equity lines of credit and second mortgages also are subject to liens - something Laface says many people don't realize. The same rules apply: If you default, the bank has a right to enforce the lien and foreclose on your home.
DELINQUENT PROPERTY TAXES
are another common reason for a lien. Says Deborah Chadow, a Nassau real estate attorney: "Homeowners - especially those whose mortgages are paid off - are particularly vulnerable for forgetting or neglecting to pay their real estate taxes that are due several times a year." The reason? "For many years, the bank may have been responsible for paying the taxes because it was required as escrow. But with no monthly mortgage to pay, homeowners can let the taxes slip through the cracks." What happens next? She says your municipality has the right to sell the tax lien to a third party at auction. Then the third party can either enforce the lien or sell it to another person. "First, however," says Chadow, "there would be notifications, and accrued interest and penalties prior to any foreclosure taking place."
Failed to pay your taxes? The Internal Revenue Service can impose a lien on your home for the amount owed, plus interest and penalties. This includes: city, county, federal, estate, income, payroll, sales or school taxes. The IRS can use your home as collateral until you pay your debt. The lien can be paid off at the time of a refinance or upon the sale of your home.
VENDOR CONTRACT LIENS
Many homeowners sign agreements with contractors to make payments over time for pricey repairs. Beware. "Unknowingly," warns Laface, "you may also be authorizing your contractor to file a lien on your property if you don't make your payments. Because contractors don't want to wait for their payments from you, they, in turn, sell the lien to a bank that pays them outright."
Also related to home improvements, a mechanics lien can be leveraged by a contractor - a plumber, gardener or electrician, for example - if you don't pay your bill. "If you think the contractor did a bad job, it's in your best interest to work out an amicable agreement before a lien is put on your property," says Laface. "However, if you do get notices of any actions being taken, take it seriously and don't ignore it. Try to work out a payment plan with the contractor before you end up in court," he says. If not (based on the dollar amount), litigation will be resolved in either Small Claims, District or Supreme Court. Even if your contractor never pursues the lien in court, once a lien is recorded, it can haunt you if you want to sell your home or refinance.
If you get sued and you lose the lawsuit, a judgment can be attached to any property you own. Until you satisfy your debt, your home will be tied to the lien.
Your credit card debt can only become a lien if the credit card company goes to court to secure a judgment against you, says Laface. Your best bet is to work out a deal with your credit card company, which often will be willing to negotiate. But what about, say, a husband's business line of credit or loan? "This can only become a lien on your home if you give specific written authorization," says Laface. "For example, if you put your home up as collateral to secure the line of credit or loan, then you could potentially lose your home." Even if you don't default, lines of credit don't have to be renewed and repayment of the used portion will come due - leading many business owners into foreclosure.
ENVIRONMENTAL CONTROL BOARD VIOLATIONS
Not cleaning up your garbage or neglecting to fix a hazard (say, a missing handrail) is another way to get a lien placed on your home.
Surprise, outstanding parking and moving violations can land a lien on your home. Although this kind of lien would not likely lead to foreclosure, it can come up on a title search if you want to sell or refinance your property, Chadow says.
Once you pay your debt, it's imperative to receive a "letter of satisfaction" from the bank or person you owed money to. The lien will not be removed from your record until it has been filed and recorded as "satisfied" with the county clerk. Bring your letter of satisfaction with the section, block and lot number of your home (found on your most recent tax bill) and make sure your lien is removed. Once that is complete, make sure to send copies as proof to the three major credit reporting agencies.
The easiest way to prevent a lien on your home is to pay your bills on time. "But if you can't," Chadow says, "especially in this economy, banks and other creditors will be willing to work out debt.'' Don't hesitate to call your bank lender, contractor, credit card company or the IRS and ask for a "workout" before a situation gets out of hand and into the courts.