The mortgage industry has its own lingo which can be very confusing for home buyers. Two words you'll come across frequently are "mortgage" and "lien." Most people understand what a mortgage is – it's the loan you take out to buy or fix up a house that's usually secured by the house. Signing a mortgage creates a lien, which is what gives the lender a legal right to foreclose on your home if you don't keep up the repayments.
A mortgage is basically just a loan that allows you to borrow money to buy or fix up a house. A lien is the bit of the mortgage that gives the lender the right to seize and sell your home if you default on the mortgage payments.
What is a Mortgage?
A mortgage is nothing more than a loan. Specifically, it's a loan you use to buy a house or renovate a house you already own. There are also special types of mortgages like reverse mortgages that take the equity in your home and convert it into a cash lump sum. As with all loans, the lender does not loan you tens of thousands of dollars out of the goodness of its heart. It wants something back in return. The reward comes in the form of interest which you pay at a predetermined rate on the amount you've borrowed.
What is a Lien?
Most mortgages are "secured" mortgages, which means you put up some type of collateral. In the case of a mortgage, the collateral is your home. What this means is, if you default on payments, the lender can get its money back by liquidating (selling) your home.
Now legally, the lender does not own your home – you do. The lender only has a mortgage interest in your property. So how can the lender sell something it doesn't own? That's where the lien comes in. A lien is a legal claim on an asset. In the case of a mortgage, it gives the lender the legal right to claim your home as their own and sell it to ensure they recover the amount of money owed them.
What's the Difference Between a Mortgage and a Lien?
It's actually quite tough to distinguish between a lien and a mortgage because, to home buyers, they are essentially the same thing. Here's the breakdown:
- A mortgage is just a loan that allows you to buy real estate.
- Mortgages are a type of lien as the mortgage papers give the lender a claim over the home. The lien is the clause in the mortgage contract that allows the lender to seize your home until you make all the payments, and sell the home if you do not.
- However, liens are not mortgages.
The final point is important. You can have a lien for all sorts of purposes, and those purposes are not all connected with buying a home. For example, the federal and state government could have a tax lien over your property for unpaid taxes, the court could put a judgment lien over your property for a debt you haven't paid and a mechanic could file a lien against your property because you haven't paid your car repair bill. All of these liens give the lien holder the right to hold your property until you pony up what you owe.
What's the Difference Between a Lien Holder and a Mortgagee?
Two more related terms you may come across are "lien holder" and "mortgagee." When you take out a secured mortgage, these people are one and the same – the lender who loaned you the mortgage cash.
When you think about other types of liens like our auto mechanic example, then it's clear that a mortgagee and a lien holder may be completely different people. In this scenario, one lien holder is the mechanic you owe money to, and another lien holder is the mortgagee who loaned you the cash to buy your home.
At this point, things get a bit complicated. That's because you have two lien holders who each have a security interest in your home. By law, the mortgage lien takes priority. This means the mortgage company gets first dibs on the proceeds when you sell the home and the mechanic will get what's left over to pay his outstanding bill.
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- First Savings: Difference Between a Lien and a Mortgage
- Fit Small Business: What is a Lien on a House or Property
- NOLO: How Lien Priority Works
- 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.
Jayne Thompson earned an LLB in Law and Business Administration from the University of Birmingham and an LLM in International Law from the University of East London. She practiced in various “big law” firms before launching a career as a commercial writer specializing in finance and tech. Her work has appeared on numerous financial blogs including Wealth Soup and Synchrony. Find her at www.whiterosecopywriting.com.