Which Liens Get Paid First in a Foreclosure & Why?

When you purchase a home with a loan, the lender places a lien on the property. By way of the lien, the property becomes collateral for your mortgage. A property can hold several liens at once, and liens get paid first in a foreclosure based on the actual recording dates of each lien. With a few exceptions, the first-recorded lien (senior lien) on a property is given priority in a foreclosure sale.

Function

A lien represents a claim to your property by the lender for the settlement of your mortgage loan. If you default on your loan, a lien gives a lender the legal right to foreclose and sell the property to satisfy your debt.

Types

A voluntary lien against your property is one to which you have consented, such as a first or second mortgage. Involuntary liens can be attached to your property for an unpaid debt and can be done without your consent. Often times a senior lien on a property is the first mortgage, and a junior lien (subordinate to a senior lien) is any lien recorded after the senior lien, often the second mortgage or a home equity line of credit.

Exceptions

Regardless of the date of recording, when a lien is recorded against your home for the non-payment of state property taxes, there is only one rule: State property taxes take priority over every other lien filed against the property and are paid first from the proceeds of a foreclosure sale. Sometimes first-mortgage lenders pay the delinquent property taxes to remain in the senior lien holder position.

IRS

When the Internal Revenue Service places a tax lien on your property, the recording date is typically the most recent, so the IRS lien is a junior lien. In the case of an IRS tax lien being deleted due to lack of sufficient proceeds from the foreclosure sale, the IRS retains redemption rights to the property. Redemption rights allow the IRS to redeem the property from the new owner within 120 days following the foreclosure sale. The IRS then sells the property at a redemption sale to recover unpaid taxes.

Recording Statutes

Lenders must handle the recording of liens in accordance with the laws of the state where your property in located. The recording laws and systems exist to ensure potential lenders can determine outstanding liens on a property and the priority of each. Generally, the first lien recorded has priority, but in the event of a foreclosure, the recording statutes of your particular state become especially important. If the senior lien holder did not follow the recording statutes, the lien holder may no longer have the priority to which they would have otherwise been entitled.