Foreclosure Classroom – Lien Priorities – Why Is It Important For You To Know?
The priority link can be better explained with an example. In simple terms, when you buy a home through financing, the lender places a lien on the property. It is called a secured loan because the home is the collateral for the loan. If you, as a homeowner, do not make payments, the lender, through a security instrument (mortgage), repossess the home. There can be multiple links in a property. Here is the example:
1. There is a first mortgage for $ 200,000, registered on 05/01/2005, at 1 PM.
2. There is a second mortgage for $ 50,000, registered on 05/01/2005, at 2 PM.
3. There is a judgment for $ 2,000, registered on 05/05/2008
4. IRS tax lien of $ 3,000, filed on 09/09/2008
5. Property tax lien for $ 4,000, recorded 04/15/2009
The general rule is: time first, place first. The first lien is higher than all other links. The second lien is less than the first, but higher than the rest.
Case 1. If the first lien is a foreclosure, all minor ties are removed. Except one. If there is anything left, the link holder of the next position is paid.
Case # 2. If the second link is running, they should take over the first link. This means that the second lienholder is responsible for liquidating the first lienholder. All the others are annihilated. Except one.
Now let’s look at the special links: Property Tax Links and IRS Links. If property taxes are not paid, they are paid first. Keep in mind that property taxes take priority over everything. It doesn’t matter when the link was recorded. This is the reason why in a property tax foreclosure all ties are erased. All of them! Except one.
Here we are talking about the IRS link. This is the great exception. The IRS link is never deleted like the rest. If there is still equity in the home, the IRS has the right of redemption. They have 120 days to redeem the property and satisfy their bond. The IRS rarely does this, but it is possible.
Lien holders can still carry on their unpaid debt. It’s called a deficiency judgment. They can collect your debt as an unsecured loan under state law. Do you think lien holders have a good chance of collecting your debt under a deficiency judgment (your status is as low as a credit card loan)? You’re right. Of course, no. That is why they rarely do.