These loans come with a certain amount of risk for the creditor. They are being asked to provide a large amount of money with an agreement that it will be periodically paid back over time.
But how can they be sure the borrower will pay them back?
In short, they can’t. This is why it’s a risk. However, they can create enforceable scenarios that encourage the borrower to repay the debt in due time.
One such method of ensuring a borrower understands that it is in their best interest to repay a loan is to create a lien.
What Is a Lien?
Basically, a lien gives the lender the ability to seize the property in question should the loan not be paid back according to the contract. These agreements can be put in place as the buyer works with a title and closing company to complete the purchase.
However, there are different types of liens. And the type of lien will depend on how it is created and how it is to be enforced.
The three basic types of liens:
- Consensual Lien
- Statutory Lien
- Judgment Lien
The agreement that creates the lien will have a large impact on the classification of it. A consensual lien is exactly what it sounds like — this is an agreement between both the borrower and the lender to the stipulations contained within the lien.
This is the major difference between a consensual lien and both statutory and judgment liens. Consent from the borrower is not necessary in either of those cases to create the lien.
There are two different kinds of consensual liens:
1. Purchase-Money Security Interest Lien
These liens deal directly with the initial purchase of a property. A mortgage is one of the best-known borrowing scenarios for purchasing a home, and it is an example of a purchase-money security interest lien.
2. Non-Purchase-Money Security Interest Lien
These liens are used for transactions that aren’t related to directly purchasing a new piece of property. Instead, the lien is placed on a property the borrower already owns. The resulting money from the transaction can be used for anything the borrower wants. Taking out a second mortgage on a home is an example of a non-purchase-money security interest lien.
As we said earlier, not all liens come from an agreement between the borrower and the lender. Statutory liens exist through actions by local or federal laws. This allows a lender to potentially sell off a piece of the property in question if the loan stipulations are not met.
There are a few different types of statutory liens.
1. Tax Lien
Unpaid taxes can have a wide range of negative effects. One such potential consequence is that the government can place a lien on your property in response to unpaid property taxes. Local statutes will dictate exactly how this works but the lien is commonly attached to the property which owes taxes. Failure to pay federal taxes can result in liens placed on every piece of property the person owns.
2. Mechanic’s Lien
Calling a contractor to your home can be expensive. Failure to pay for home repairs or remodels can result in a lien being placed on your property for the amount of money owed. An example of this would be if a person were to have a new roof placed on their home but failed to pay the resulting invoice.
3. Landlord’s Lien
Commonly applied to commercial property, a landlord’s lien gives the owner of a property the ability to recover unpaid rent from a tenant.
These scenarios are created when a court gives a lender the ability to seize a property after the borrower fails to meet the requirements stated within the contract.
A lender may sue a borrower after the loan payments fall behind. The lien can be created after successfully completing the court process.
These liens can potentially apply to future properties if they are not satisfied by what is currently available at the time of the ruling.