When a home goes into foreclosure, the lender holding the mortgage eventually progresses to a foreclosure sale, where the property is typically sold at auction. If there is debt attached to the property, that debt will be taken out of the purchase money for mortgage resolution. The money for paying off debts comes out of the money the buyer pays for the foreclosed home, issued in order of priority as determined by law.
When a lender sells a foreclosed home, any money remaining after the mortgage balance is paid goes to pay off liens, in priority order, until the proceeds run out.
Judgment Lien and Foreclosure
Ideally, a homeowner will make payment arrangements before foreclosure proceedings begin. If not, the lender has little choice but to sell the home in order to recoup at least part of its investment. If there are secondary debts such as second mortgages or liens, that money will be paid after the lender is repaid for the balance remaining on the mortgage. If there isn’t enough money to cover it all, those waiting in line may get nothing.
But that doesn’t always mean the debt goes away. There are creditors who have lost money, and in some states, those creditors could sue you if you’re the original homeowner. A second mortgage foreclosure auction won’t take place, but you signed paperwork stating you’d repay the debt, and that paperwork isn’t wiped out just because the property it was attached to is no longer yours.
Judgment liens are a different matter, however. Those liens will no longer be attached to the original property, but that doesn’t mean they can’t be attached to something else you own. A home with a judgment lien in foreclosure will sell, but if the lien isn’t paid off, it can be attached to a piece of real estate you own in the future. Creditors who don’t want to wait can also freeze your bank account or garnish your wages to get the money you owe.
Determining Lien Priority
When a foreclosed home is sold at auction, after giving the purchase money to mortgage lender, any remainder of the proceeds go to pay off debts attached to the property. Those are distributed in priority order until the funds run out. That order is:
- First in Time, First in Right – This rule states that the first lien to be recorded with the county recorder is paid first, with others following in the order that they were filed. Since the mortgage is usually recorded before any liens are placed on the house, this gives a first mortgage top priority.
- Exceptions to the Rule – Although the First in Time, First in Right rule is handy, there are certain liens that trump the rule. Property tax liens, some homeowners association assessment liens and mechanic’s liens can rise to the top no matter when other liens were recorded.
- Secondary Liens – Once any higher-priority liens have been paid, all other liens will go through in the order in which they were recorded. If a judgment lien foreclosure runs out of money, any unpaid creditors may take further measures.
Buying Foreclosed Homes With Liens
A homebuyer with the cash to use purchase money at a mortgage auction for a foreclosure may see advice to conduct a search to make sure there are no liens in place before the sale goes through. Although it’s always wise to research before buying, the new homebuyer won’t be responsible for the previous homeowner’s debts. However, if you’re buying a home outside of a foreclosure situation, unlike a second mortgage at foreclosure auction, the seller of that home will have to pay it off before the deal can close, which can slow things down.
If you’re buying a home at a first or second mortgage foreclosure auction, though, it’s important to note that you may have difficulty getting a mortgage for that home. Those who are paying cash won’t need to heed this advice, but if you’re trying to get a loan, you could find you have difficulty getting through the multiple stages of approval if there are any documented issues with the house.
- Credit.com: Understanding Your Foreclosure Rights: A Consumer Law Review
- NOLO: What Happens to Liens and Second Mortgages in Foreclosure?
- FreeAdvice Legal: Lien Foreclosure Sales
- NOLO: What Is Lien Priority?
- Zillow: How to Investigate Liens on Foreclosures
- Bank of America: How to Buy a Foreclosed Home
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.