If you purchase real estate and obtain a mortgage, the lender will place a lien on the property. Your property is the collateral for the loan. If you default on the mortgage, the lender can foreclosure upon the property. The recording date of the lien is important to lien holders on your property because liens are prioritized by who records first. There are exceptions to this rule for state property taxes and assessments by municipalities and IRS tax liens. The laws vary from state to state as well. Generally, state property taxes and assessments from municipalities have priority over all liens. The IRS is next in line ahead of other junior lien holders no matter when they file and record their lien. The IRS has 120 days to redeem the property after a non-judicial foreclosure sale. The IRS generally does not exercise its right to foreclose unless there is substantial equity in the property and the taxes owed are more than $10,000.
Liens During a Foreclosure
1st Liens Get Paid First:
The customary foreclosure process is for the lender who is the 1st superior lien holder, which is always your primary mortgage holder, to initiate foreclosure proceedings and foreclose upon the property. Typically, the lender will commence foreclosure proceeds after the borrower is in default for at least 90 days. The property is then sold at a foreclosure auction sale.
Secondary and Junior Liens:
If the property sells for less than what is owed, the junior lien holders get nothing and are wiped out. So for example, ABC lender recorded their lien first. XYZ lender has a second mortgage, which is a home equity line. The recorded their lien second. The XYZ lender would be a second/junior lien to the ABC first/senior lien holder. ABC forecloses upon the property and the property is sold at a foreclosure sale. If there are any state property taxes owed, they get paid first, then the first lien holder ABC lender would get the balance of the money less fees and costs. The IRS has 120 days to redeem the property. If they don’t, then the first lien holder gets the property. The senior and/or the junior lien holder may be able to obtain a deficiency judgment against the borrower if permitted by state law. Not all states allow deficiency judgments.
Property Tax Lien Foreclosure Sales
Property tax lien foreclosure sales generally occur when there are no mortgage liens and the borrower is delinquent in their property taxes. Otherwise the mortgage lien holder generally pays off the property taxes to remain the senior lien holder. If the municipality foreclosures upon the property and conducts a property tax lien sale, the property is sold for the amount of taxes owed to the county plus any other fees and costs that are customary in that county.
Lien priority enforcement through foreclosure proceedings depends on who is foreclosing. If you are a lien holder on a property, it is important that you record your lien immediately and check to see if there are any other liens that are superior to your lien so you know the status of your lien. Junior liens, including judgment liens and mechanic’s liens, get wiped out in foreclosure sales.
Advice from a Real Estate Attorney
Lien priority foreclosure laws are complicated. You should consult with an attorney if you are involved in a lien priority foreclosure transaction. The attorney can advise you about the foreclosure and lien priority laws and prepare any documents that need to be filed and/or recorded in connection with a lien priority foreclosure transaction.