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Is a Lien a Mortgage?

This article seeks to explain the basic distinctions between liens and mortgages, as well as how they operate and the various types of liens.

No, a lien is not a mortgage. A mortgage is an agreement between a lender and a borrower for financing to purchase real estate or other assets. Liens, on the other hand, are a type of security interest that may be asserted on many kinds of properties and assets. Liens are a means of protecting the lender from losses if the borrower defaults on the loan.

This article is a comprehensive overview of the difference between mortgaging and liens, and what it means for those looking to invest in a property.

It explains what distinguishes a lien from a mortgage; how liens operate; the different types of voluntary and involuntary liens; and what rights a person has with regards to liens on their property.

It also includes details such as examples and subtypes of mechanic liens, and the consequences of not paying taxes or dues to homeowners associations.

What Distinguishes a Lien from a Mortgage?

While a lien is a sort of mortgage, a mortgage is not a lien. In that, they are both security interest choices used to ensure that loans get returned, and obligations are met. Liens and mortgages are relatively similar but not the same.

A lien is a claim made on a property. The claim functions as an assurance for money borrowed or owed. The lender has complete authority over the claim if the borrower fails to fulfill his obligations.   

The following are the main distinctions between a lien and a mortgage:

  • A lien is a stake in the possession of another person. It is a deal struck to get a loan. In the best interest of the lender, a lien on the property guarantees that the collateral stays safe.
  • A mortgage is a different idea in itself. A mortgage is an agreement between the lender and the borrower. That enables the borrower to get financing from the lender to buy real estate or other assets. 
  • Mortgages are a sort of lien since they provide the lender with a claim over the borrower’s assets. But they only give them the right to keep the property until the loan is repaid. 
  • Liens are a type of security interest that may be asserted on many kinds of properties and assets. And can also be placed over the payment of money owed for a service done. Thus they are not mortgages.

How do Liens Operate?

A financed piece of property is more than often subjected to liens. Liens placed on properties, automobiles, and small businesses are the most common examples. 

When you finance a home or a car, you consent to the property being subject to a lien. It shields the lenders from financial loss in the event of a default by the debtor. 

Suppose a borrower doesn’t make payments on a house they funded or an asset they bought. Then, the lender will take over and foreclose on the home or any other asset. The asset may be reclaimed by the lien-holding lender in order to make up for value lost due to missed payments.

To get funding, a borrower must submit to voluntary liens. Without it, the lender takes on too much risk. And only a few are willing to take on the danger of default in the absence of collateral.

It’s crucial to understand that liens can also come into the picture for a variety of reasons. Not all liens are related to buying an asset or building a home. Here are some instances:

  • A mechanic could register a lien on your property because you haven’t paid your repair bill. 
  • The federal and state governments could have a tax lien over your property for unpaid taxes 
  • A court could have a judgment lien over your property for a debt you haven’t paid. 

What are the Different Types of Lien?

Voluntary and involuntary liens are the two major types of liens. According to the type, liens may have varying effects on you. Liens of all types are recorded by the law against the title to the property. 

The following are the two major types of liens:

Involuntary Liens  

Accumulated debts frequently result in the placement of an involuntary lien. Before you can fully utilize your property rights, you might need to resolve these debts. Here are some types of involuntary liens explained:

Judgments Lien: If the court finds that you owe a debt and are unable to pay it in full, the judge may place a lien on your home. The debt may be owed for a variety of reasons, including:

  1. child support
  2. alimony
  3. medical expenses
  4. credit card debt
  5. gambling debt

Statutory liens: These liens can be issued without your permission as they are permitted by law, not because a judge has approved them. Examples of statutory liens include:

  1. Tax liens: If you don’t pay your taxes, the Internal Revenue Service (IRS) may place a tax lien on your home.
  1. Homeowners Association liens: If you don’t pay your yearly or ongoing dues, your homeowner’s association (HOA) may place a lien on your home.
  1. Mechanics liens: If you don’t pay for the materials and labor to a mechanic who provided service to you, they may appeal to place a lien on it. The following are the subtypes of mechanic liens: 
  • solar 
  • HVAC
  • heating
  • roofing 
  • plumbing

Voluntary Liens 

Lien mortgages on homes and liens put on financed vehicles are the two most typical types of voluntary liens. Any valuable property can be the subject of a voluntary lien. The purpose of a voluntary lien is to allow a creditor to get security for a debt or service delivered.

Property that can voluntarily be subjected to voluntary liens includes:

  1. Homes (real estate)
  2. Automobiles 
  3. Appliances
  4. Precious art and more

What Rights Do You Have?

You can use your collateral for the lien to the utmost degree permitted by law. It’s as long as you continue to make timely payments. But under the constraints of building and zoning limitations, along with similar restrictions. 

No occupancy, visitation, or other use of the property is permitted by the standard lien. But the game may drastically change if you start to miss payments consistently.

Final Thoughts 

A lien is not exactly a mortgage. And when financing a major asset, most owners have liens on their properties. Since they are voluntary, these liens won’t harm you. But some involuntary liens can harm your finances and credit score, so be wary of what you are getting into.