Can having a lien affect your ability to refinance your mortgage? This is the question asked by millions of homeowners every year, and the answer may surprise you. But first, it’s important that the definition of the term is clearly communicated.
What Is A Lien and How Many Types Are There?
Simply put, a lien is a form of security interest which has been granted over your property, with the purpose of securing debt payment. Types of liens include judgments and tax and mechanic’s liens.
A mechanic’s lien on your home can be filed by the general contractor who you commissioned to build your home until they have received payment from you. Should you become involved in some sort of lawsuit, you may be the subject of a judgment lien, which can be used to collect awarded money. Tax liens can be filed when you fail to pay any of your property or income taxes.
Why Are Liens Dangerous?
Should the lien be filed by a party other than the homeowner, it can give them legal interest in your home, which increases your legal liability. Without clear indication of who owns your home, this can make it much more difficult to refinance or sell.
Liens and Refinancing
In the old days when home values were continuously on the rise, a homeowner’s second mortgage could be paid off using the cash received in addition to the original mortgage. But when the crash happened, there wasn’t enough equity in most homes to be able to pay off that second lien.
Taking a second lien on your home makes it secondary to your original mortgage. And although having a lien can make it incredibly difficult to refinance, there are two options to dealing with a secondary lien if you want to do just that. It will either need to be paid off, or the homeowner will need to see if whoever holds that second lien would be willing to keep it secondary when a refinance with the new mortgage occurs.
Experts warn that getting a lender to agree to the latter may not be easy. Subordinations aren’t looked favorably upon by many institutions. In fact, a lot of them won’t agree to any subordination requests. Even worse can be those institutions that will neither approve nor decline your request.
How Lenders See Liens Now
Due to the fact that a lender risks being in a secondary position should payments fail to be made, they are looking much more closely at those homeowners who request subordination. One factor that can cause a denial is if you receive cash when you refinance. Another is your loan to value ratio for both the first and second loans. Both of these factors affect the risks a lender takes should they decide to approve your request.
Getting a Lien Lifted
Many homeowners choose to try and get their lien lifted before they refinance. The process involves first getting a number from the institution to which the lien is owed. This figure should include the amount of the lien, as well as any fees, interest and other penalties.
The creditor will then have to be paid the amount they quoted you. But the entire amount must be paid, including any penalties, or the lien may not be released. Then, the lien document must be obtained, and then brought to the location where the original recording of the lien took place. This is usually the Recorder of Deeds or the County Clerk’s office.
The lien will not be officially cancelled until one of the above entities cancels the lien of record. And this cannot occur unless the full lien amount has been paid.
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Guest author Tony Donovan writes on a variety of topics relating to the mortgage industry, including advising consumers on their options for a home mortgage refinance in the current economy.