Mortgage Lien

Definition

A Mortgage Lien is an encumbrance on a property used to secure a loan. The lien gives the lender a claim to the property if the borrower defaults on the loan. The priority of the lienholder’s claim depends on the order of recording and any subordination agreements. A first mortgage generally has priority over other mortgage liens.

Examples

Home Purchase: Suppose John obtains a mortgage loan to buy a new house. John signs a promissory note and a mortgage contract. As a result, the lender will place a mortgage lien on the property. If John defaults on the loan, the lender can foreclose and use the sale proceeds to recover the owed amount.
Refinancing: Sarah refinances her first mortgage and takes a new loan with a lower interest rate. The new lender will record a new mortgage lien, which will generally take the priority unless subordinated to another existing lien.

Frequently Asked Questions

Q: What happens if the borrower defaults on a mortgage loan?
A: If the borrower defaults, the lender can foreclose on the property. This means the lender exercises the lien to force a sale of the property, with the sale proceeds used to pay off the debt.

Q: What determines the priority of a mortgage lien?
A: The priority is determined by the order in which the lien was recorded. A first mortgage lien recorded earlier typically has priority over subsequent liens unless a subordination agreement dictates otherwise.

Q: Can there be multiple mortgage liens on a single property?
A: Yes, there can be multiple liens such as a first mortgage, a second mortgage, and possibly more, each potentially secured by different loans. The order of priority will affect which liens get paid first in the event of a foreclosure.

First Mortgage: The primary loan against a property, holding the highest priority in case of default.
Second Mortgage: A subordinate loan taken out against a property in addition to the first mortgage, having lower priority.
Foreclosure: The legal process by which a lender can repossess and sell a property if the borrower defaults on the loan.
Subordination Agreement: An agreement that alters the priority order of existing liens against a property.

Online Resources

References

[Geltner, D., Miller, N., Clayton, J., & Eichholtz, P. (2013). Commercial Real Estate Analysis & Investments. South-Western Educational Pub.]
[Brueggeman, W. B., & Fisher, J. D. (2011). Real Estate Finance & Investments. McGraw-Hill Education.]

Suggested Books

The Book on Rental Property Investing by Brandon Turner
Real Estate Finance and Investments by Peter Linneman
Mastering the Art of Commercial Real Estate Investing by Doug Marshall

Real Estate Basics: Mortgage Lien Fundamentals Quiz

### What is a mortgage lien? - [x] An encumbrance used to secure a loan - [ ] A property appraisal - [ ] A document transferring property ownership - [ ] An insurance policy for homeowners > **Explanation:** A mortgage lien is an encumbrance on a property used to secure a loan, giving the lender a claim to the property in case of default. ### What happens if you default on a mortgage loan? - [ ] The property value increases - [x] The lender can foreclose on the property - [ ] You automatically receive another loan - [ ] The lien is released > **Explanation:** If you default, the lender can foreclose, meaning they can force the sale of the property to recover the owed debt. ### What determines the priority of a mortgage lien? - [ ] The borrower's credit score - [ ] The loan interest rate - [x] The order of recording the lien - [ ] The property's purchase price > **Explanation:** The priority depends on the order of recording. Liens recorded earlier usually have higher priority. ### Can there be multiple mortgage liens on a property? - [x] Yes, such as a first and second mortgage - [ ] No, only one lien is allowed - [ ] Only if the owner has paid off the first lien - [ ] Only in commercial real estate > **Explanation:** Multiple mortgage liens can exist, each secured by different loans against the property. ### What legal process allows a lender to claim a property in case of borrower default? - [ ] Renting - [x] Foreclosure - [ ] Leasing - [ ] Appraisal > **Explanation:** Foreclosure is the legal process by which a lender can claim and sell a property if the borrower defaults on the mortgage loan. ### What is a second mortgage? - [ ] The main loan for purchasing a property - [x] A subordinate loan that has lower priority than the first mortgage - [ ] An unsecured loan for property renovation - [ ] A loan with the highest claim on mutual funds > **Explanation:** A second mortgage is a subordinate loan against a property, having lower priority than the first mortgage. ### What can alter the priority order of existing liens against a property? - [ ] A property appraisal - [ ] A loan estimate - [x] A subordination agreement - [ ] An ownership ledger > **Explanation:** A subordination agreement can alter the priority order, giving one lien precedence over another. ### Which term refers to the primary loan against a property? - [x] First mortgage - [ ] Property tax - [ ] Homeowners insurance - [ ] Title insurance > **Explanation:** The term "first mortgage" refers to the primary loan against a property, which usually has the highest priority. ### How does the priority of liens affect the proceeds from a foreclosure sale? - [ ] All lienholders get paid equally - [x] Higher priority liens get paid first - [ ] Liens are paid in reverse order - [ ] Remaining proceeds are donated > **Explanation:** During foreclosure, lienholders with higher priority get paid first from the proceeds of the sale. ### Why is the recording order of a lien important? - [ ] It influences the property insurance rates - [x] It determines the priority of claim on the property - [ ] It affects the property's market value - [ ] It sets future interest rate changes > **Explanation:** The recording order is crucial as it determines the priority of each lien's claim on the property in case of default or foreclosure.