What is a privilege and how does it work?


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Privileges can get a bad rap, but not all should be avoided. Specifically, any mortgage lien placed by your lender when you buy a home, refinance, or get a home equity loan is a normal part of the borrowing process and is nothing to worry about. A lien only becomes a problem if you fall too far behind in paying your debts.

Here’s what you need to know about privileges:

What is a privilege?

A lien is a claim on your property related to a unpaid debt. This gives the creditor a way to collect what is owed to them if you don’t make payments.

If you want to refinance your mortgage or get a second mortgage, you will need a clear title. The same goes if you want to sell your house; the new owner will want to be able to own the house without anyone asserting their ownership rights.

How privileges work

A privilege can be voluntary or involuntary. Here’s how the two differ:

  • Voluntary privilege: This is a privilege that you accept. When you to buy a house or refinance, you agree – somewhere in every mortgage document you sign at closing – to allow the lender to place a lien on your property. The lien ensures that if you sell your home, the lender will be paid back.
  • Involuntary privilege: This is a privilege you do not agree to. Homeowners associations, tax authorities, contractors, or other creditors can place liens on your home if you don’t pay them what you owe.

Advice: The fine print of your agreement with your HOA or contractor will likely inform you of the possibility of a lien. Make sure you understand what you are agreeing to before signing a contract.

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Types of privileges

Not all liens are bad: the first lien on a property is the mortgage. Without this privilege, you would not be able to borrow this huge amount of money to purchase your home. However, some privileges may result from legal action.

Mortgage privileges

A mortgage lien is not harmful as long as you make regular payments on your home loan. When you pay off your mortgage, the privilege disappears.

If you are late and can’t refinance or make a catch-up plan with your lender, you’ll end up in foreclosure. At this point, the mortgage lien allows the lender to sell your home and keep enough of the proceeds to cover what you owe.

The privileges of owners’ associations

If you pay your homeowners association dues and special dues on time, you don’t have to worry about homeowner association privileges.

If you don’t pay them, however, the owners association can place an automatic lien on your property. And if you don’t catch what you owe, the HOA has the right to grab.

Tax privileges

A tax lien can be placed on your property if you do not pay property taxes or income taxes. As with mortgage liens and HOA liens, if you don’t pay what you owe, the lien holder can foreclose on your home. They can then sell the property at auction to pay off your debt.

For example: The IRS regularly holds auctions of real and personal property it has seized to repay the federal government in arrears tax debts. Local tax assessors use a similar process to deal with unpaid property taxes.

Mechanic’s privileges

The privilege of a mechanic isn’t exactly what it sounds like: it has nothing to do with automobiles. Instead, these are contractors you hire to do repairs or improvements to your home. This is why it is also called the construction privilege or the materialist privilege.

If you don’t pay the HVAC mechanic who repaired your air conditioner, he may attach a lien to your home. The same goes if you don’t pay a roofer, carpenter, or anyone else who works on your property.

Subcontractors and suppliers can also file a mechanic’s lien, so it is important to work with reputable contractors who pay their subcontractors and suppliers.

Privileges of judgment

Also called court lien, court lien can attach to your property when you lose a lawsuit and owe the other party money. When a creditor, such as a credit card company or a debt collector, gets a judgment against you for unpaid debt, they won’t automatically be granted a lien on your home in most states.

However, if you continue to refuse to pay and collection attempts don’t work, you could end up with a judgment lien.

Solar privileges

If you are funding solar panels for your home, the solar company can put a solar lien on your property until you have paid for the panels.

Learn more: What is a mortgage?

How to remove a lien on a property

Paying off debt is the most common way to remove a lien, but other avenues of action, such as settling with the lien holder, may also be possible.

Pay off the debt

If the lien is legitimate and you have the money, paying down your debt is the obvious solution. For example, if you haven’t finished paying the contractor who remodeled your kitchen, or if you’ve been months behind on your HOA dues, all you need to do is stick to your commitments.

Advice: If you have already paid what you owe, request a release or satisfaction of lien from the lien holder and have them register the satisfaction of lien with the county. If the privilege is not legitimate, you may be able to have it withdrawn in court.

Settle with the privilege holder

If you have a legal lien against your home for something like unpaid credit card debt, you may be able to negotiate a settlement with the lien holder.

In other words, you might be able to settle the debt for less than 100% of what you owe, especially if you have little or no equity in your home.

Another possibility may be to negotiate a payment plan to repay the lien. Make sure you get a written agreement.

Sell ​​the property

Yes, you can still sell a property without clearing unpaid liens, but you will need home equity.

If the proceeds from the sale of your home are high enough to pay off your debt, then a sale can eliminate the lien and clear the title. The obvious downside to selling your property to pay for a lien is that you will have to find another place to live.

Exhaust the statute of limitations

If you insist on paying a lien long enough, will it just disappear? That’s what people hope for when they talk about running out of the statute of limitations, but you’re much more likely to end up in hot water.

Limitation periods on real estate liens vary from state to state. They also depend on the type of privilege. For example:

  • You can’t miss a land tax lien, HOA lien, or mortgage lien. Tax collectors, HOAs, and lenders can all foreclose on your property if you don’t pay them.
  • The statute of limitations for a federal tax lien is generally 10 years. However, it can be extended if you enter into an installment agreement with the IRS or ask them to release a tax on your assets. Plus, the IRS can collect, seize, and sell your assets if you refuse to pay your taxes.
  • For a mechanic’s lien or a judgment lien, the law varies by state. In Georgia, for example, the limitation period for a judicial lien is seven years. The creditor can then renew the lien for a further period of seven years.

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About the Author

Amy Fontinelle

Amy Fontinelle is a mortgage and credit card authority and contributor to Credible. His work has appeared in Forbes Advisor, The Motley Fool, Investopedia, International Business Times, MassMutual, and more.

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