Short sales involving liens are a common problem among struggling homeowners. Liens for unpaid liabilities are either the cause of financial hardship that leads to a short sale or symptomatic of the borrower's hard times. A bank can't approve a short sale unless all lien holders agree to release their liens on the home's title. The seller must convey a clear and marketable title to the buyer of a short sale home.
Creditors attach liens to real estate property titles to secure repayment of a debt. With French and Latin origins, the term "lien" means "tie" or "bond." You must pay a lien tied to your property title before you sell or refinance the home. The same holds true in short sale transactions in which a mortgage borrower sells his home for less than he owes his lender. The bank may voluntarily agree to accept less than the balance owed if all other lien holders agree to the same.
A mortgage is the main type of lien involved in a short sale transaction. The primary lien holder is typically the bank to which you owe the first and largest mortgage debt. This bank is usually the party that has priority when a pay-off occurs through sale or refinance. It is often the first to foreclose to recoup losses, as well. Many borrowers in short-sale transactions have more than one mortgage lien. This means they must pay off a second bank or lending institution for a second mortgage, home equity line of credit (HELOC) or home equity loan.
Other liens which require release have nothing to do with your bank loan. Among the most common in short sales are IRS liens for unpaid income taxes and homeowners association liens for unpaid dues. Mechanics liens for constructions and repairs made to the home as well as personal judgments can also derail a short sale if unpaid. During the short sale process, you must get all creditors to release their liens. They may do this if you agree to pay them in full or make other payment arrangements. Some lien holders, such as the IRS, may agree to take a full loss and release the lien for zero repayment as a result of your financial hardship.
As a short-sale seller or buyer, you'll want to identify all liens before entering into a transaction. Employ a title company to provide a title report, which discloses all current lien amounts, recording dates and creditor information. Prepare your financial information to present to each lien holder individually. All parties have a unique set of guidelines for releasing a lien via short sale. Familiarize yourself with their protocol and submit all paperwork in a timely manner. You must coordinate a concurrent lien release among all lien holders in order to successfully complete the short sale.
- Chicago Tribune: IRS Must Release Lien Before Short Sale Can Proceed
- Bankrate.com: Unpaid Liens Can Ruin A Short Sale
- Connecticut Realtor: What Is This Thing Called Marketable Title? By Judith I. Johannsen
- Nolo: What is a Property Lien?
- Internal Revenue Service. "Understanding a Federal Tax Lien." Accessed Sep. 18, 2020.
- Experian. "Tax Liens Are No Longer a Part of Credit Reports." Accessed Sept. 18, 2020.
- Experian. "What Affects Your Credit Scores?" Accessed Sep. 18, 2020.
- Federal Trade Commission. "Fair Credit Reporting Act 15 U.S.C § 1681," Page 22. Accessed Sep. 18, 2020.
Karina C. Hernandez is a real estate agent in San Diego. She has covered housing and personal finance topics for multiple internet channels over the past 10 years. Karina has a B.A. in English from UCLA and has written for eHow, sfGate, the nest, Quicken, TurboTax, RE/Max, Zacks and Opposing Views.