Definition and Overview
A junior lien is any lien that is subordinate to another lien against the same property. By definition, a junior lien only gets paid after the claims of senior lienholders have been satisfied. In most cases, junior liens come in the form of a second mortgage, home equity loan, or other debt secured by the property. These liens are considered riskier by lenders because they will only be paid if there are enough resources left after the more senior liens are dealt with in the event of a foreclosure or default.
Examples
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Second Mortgage: Abel obtains a primary mortgage loan from Solid Savings to finance a property purchase. To further reduce the down payment, he takes out a secondary mortgage from Baker, an investor. In the case of default, Solid Savings will be the first to receive foreclosure sale proceeds. Baker, holding the junior lien, will receive whatever funds remain, if any, after Solid Savings’ lien has been fully satisfied.
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Home Equity Loan: Jane has a first mortgage with Hill Bank. She later decides to renovate her home and takes out a home equity loan from Valley Credit. In this arrangement, Hill Bank holds a senior lien while Valley Credit holds a junior lien. If Jane defaults, Hill Bank’s lien will be paid first.
Frequently Asked Questions
What Risks Are Associated With Holding a Junior Lien?
The primary risk associated with a junior lien is that there may not be sufficient proceeds from the sale of the property to satisfy the junior liens after senior lienholders have been paid.
Can Junior Liens Be Refinanced?
Yes, junior liens can be refinanced. However, refinancing may be complicated if the primary mortgage is still outstanding, as new terms would need to be negotiated.
Are Junior Liens Collectible in Foreclosure?
Junior liens are only collectible if there are remaining proceeds from the foreclosure sale after satisfying senior liens. Therefore, their collectibility is often uncertain and less reliable than senior liens.
Do Junior Liens Affect the Borrower’s Ability to Sell Their Property?
Yes, before selling a property, all existing liens must be settled. Therefore, having a junior lien might complicate the selling process if the mortgage balance exceeds the selling price.
Related Terms
- First Lien: The senior lien which takes priority over other liens on the same property.
- Subordinate Lien: Another term used synonymously with junior lien, indicating its secondary priority status.
- Foreclosure: The legal process by which a lender takes control of a property after the borrower fails to meet the mortgage obligations.
- Second Mortgage: A loan that uses the borrower’s home as collateral just like a primary mortgage but ranks below the primary mortgage in priority.
- Subordination Agreement: A legal document establishing that one debt ranks behind another in priority for collecting repayment from a borrower.
Online Resources and References
- Consumer Financial Protection Bureau (CFPB)
- National Association of Realtors (NAR)
- Investopedia: Subordination
- Rocket Mortgage: Understanding Second Mortgages
Suggested Books for Further Studies
- The Book on Mortgage Planning by Steve Ely
- All About Mortgages: Insider Tips by Julie Garton-Good
- Dictionary of Real Estate Terms by Jack P. Friedman
