Selling a House With a Lien or Judgment on It

A lien does not stop you selling a house. It stops you keeping the money until the lien is paid. Almost every lien is cleared from the sale proceeds at closing, by the title company, without you doing anything except signing. The exceptions are the ones where the liens add up to more than the house is worth, and that is a different problem with its own solutions. This is general information, not legal advice.

What a lien is

A lien is a claim against the property that secures a debt. Your mortgage is a lien. So is an unpaid property tax bill, a judgment from a lawsuit that was recorded against you, an unpaid contractor's claim, an HOA's claim for unpaid dues, a federal or state tax lien, and in some states unpaid child support. Because the lien attaches to the house rather than to you, a buyer cannot get clean title until it is released, and no title company will insure the sale until it is.

How they get paid at closing

The title search finds every recorded lien. The closing agent requests a payoff letter from each creditor, adds the payoffs to the settlement statement, pays them out of the buyer's money at closing, and records the releases. You receive what is left. In order of who gets paid first, it is usually:

1. Property taxes and municipal charges, which generally sit ahead of everything.
2. The mortgage, and any second mortgage or home equity line in the order they were recorded.
3. Other recorded liens: judgments, contractor liens, HOA liens, tax liens, in an order set by state law and recording date.

If the sale price covers all of that, the lien was never really a problem. It was a line on a statement.

Liens you may not know about

Sellers are routinely surprised by their own title search. A mortgage from a refinance that was paid but never formally released. A judgment from a credit card lawsuit ten years ago. A lien from a contractor who was paid by a previous owner and never filed the release. A municipal lien for a water bill or a code fine. None of these is fatal, but every one takes time to clear, and the ones from defunct lenders or dead contractors can take weeks. Order a title search early, before you have a buyer waiting on a date.

When the liens exceed the value

This is the real problem, and there are three ways through it.

• Negotiate the lien down. Judgment creditors and contractors frequently accept less than face value to get paid now rather than wait for a house that might never sell. A written offer of partial payment in exchange for a full release is a normal conversation.
• A short sale on the mortgage. If the mortgage itself is the problem, the lender may accept less than the balance; see selling before foreclosure.
• Bring money to closing. Sometimes the shortfall is small and paying it is cheaper than the carrying costs of not selling.

Liens that behave differently

• Federal tax liens. The IRS has a process for releasing a lien from a specific property so a sale can close, even when the lien is not paid in full, but it takes time and paperwork. Start it the week you decide to sell.
• HOA liens. In some states an association's lien for unpaid dues has priority over the mortgage for a limited amount, which makes it the first thing the title company wants resolved.
• Mechanic's liens. These expire if the contractor does not sue within a statutory window, which varies by state. An old one may be unenforceable, but it still has to be dealt with on paper.
• Judgments against somebody with your name. Common and infuriating. An affidavit that you are not that person usually clears it.

What to do first

1. Pull your own title. A title company will run a preliminary report for a modest fee, and it shows you every lien before a buyer sees it.
2. Get a payoff figure for each one, in writing, with a date.
3. Add them up against a realistic sale price. Realistic means as-is if the house needs work, not the number a renovated neighbour got.
4. If there is a gap, start negotiating with the smallest creditors first. They settle fastest.

A cash buyer changes one thing here: speed. Liens accrue interest and penalties, and a tax lien or an HOA lien can keep growing while a financed buyer's lender works through a file. Closing in two or three weeks instead of two or three months is often the difference between a sale that clears the liens and one that no longer does. It does not change what is owed, and anyone who says it does is not being straight with you.