Prior Lien

What is a Prior Lien?

A prior lien is a legal right or interest that a lender has in a borrower’s property, granted to secure the repayment of a loan or fulfillment of some other obligation. This lien is established well before any other liens are created on the given property, giving it superior or first priority. In general, tax liens, such as property tax liens, almost always have priority even if they are recorded after other liens.

Key Characteristics

First Priority: It holds superior status over any subsequent liens.
Existing Liens: Any claim or lien created on the collateral property after the prior lien will be secondary.
Enforceable: During default, the earlier lien (prior lien) must be satisfied before other liens.

Practical Example

The Powells have a mortgage lien arranged when they purchased their home. They then take out a home equity loan to cover medical expenses. In this situation, the mortgage lien is a prior lien. Should they default on their home equity loan, the initial mortgage must be cleared before dealing with the home equity loan.

Examples of Prior Lien Scenarios

First Mortgage vs. Second Mortgage:
- Mr. and Mrs. Smith took out their first mortgage when they bought their house. Down the line, they applied for a second mortgage for home improvements. In this case, the first mortgage has priority over the second mortgage.
Property Tax Lien vs. Mortgage Lien:
- If John has an existing mortgage on his house and later incurs a property tax lien, the property tax lien typically takes hierarchical priority over the mortgage in the case of default.

Frequently Asked Questions (FAQs)

What determines lien priority?

Lien priority is determined by the order in which liens are recorded. Usually, the first lien filed gets first priority, but certain liens such as tax liens are given automatic precedence.

Can the priority of a lien change?

Lien priority is generally fixed, but it could change through actions such as refinancing, wherein the terms of the existing liens are revisited.

What happens in the case of default?

In case of default, the earlier liens are settled first from the proceeds of the property before any later or junior liens.

Are there any liens with special priority status?

Yes, government-imposed liens like property tax liens and Internal Revenue Service (IRS) tax liens typically have super-priority status regardless of when they are recorded.

Junior Lien: A lien that is subordinate to prior liens. Inferior claims that satisfy obligations only after senior claims are met.
Subordination Agreement: A legal agreement that establishes one debt as ranking behind another debt in priority for collecting repayment from a debtor.
Tax Lien: A lien imposed by law upon a property to secure the payment of taxes.

Online Resources

References

Black, Henry Campbell. Black’s Law Dictionary. West Group, 1999.
Miller, Roger LeRoy, and Gaylord A. Jentz. Fundamentals of Business Law: Summarized Cases. South-Western College/West, 2007.

Suggested Books for Further Studies

Glink, Ilyce R. 100 Questions Every First-Time Home Buyer Should Ask. Three Rivers Press, 5th ed., 2005.
Jacobs, Barry L. A Quick Guide to Real Estate Finance. Jossey-Bass, 3rd ed., 2004.
Meyers, Lawrence D. The Practitioner’s Guide to Real Estate Law and Local Government Agencies. Marketplace Books, Inc., 2006.

Real Estate Basics: Prior Lien Fundamentals Quiz

### What is a prior lien? - [ ] A lien that is placed on the property after all other liens. - [ ] A temporary lien that must be validated by a court. - [x] A lien that is in force before any subsequent liens or claims. - [ ] An unrelated lien affecting different property owned by the debtor. > **Explanation:** A prior lien is one that takes precedence over any other liens established after it is created on the same property. ### What typically happens to a prior lien in the event of default? - [x] It must be satisfied before any later liens. - [ ] It will be subordinated to later liens. - [ ] It is removed entirely. - [ ] It is split among all creditors. > **Explanation:** During a default scenario, the prior lien should be satisfied before any secondary or junior liens. ### Which of the following always has the highest priority over other liens? - [ ] First mortgage - [ ] Home equity loan - [x] Tax lien - [ ] Mechanic's lien > **Explanation:** Tax liens typically have a super-priority status and must be cleared before other liens, even if they are newer. ### Can the priority status of a prior lien change? - [x] Yes, through a subordination agreement. - [ ] No, it can never change. - [ ] Yes, only through third-party arbitration. - [ ] No, unless validated in court. > **Explanation:** Priority can change, particularly through legal instruments like a subordination agreement, which can prioritize a different lien. ### What automatically gives certain liens priority regardless of their recording date? - [x] Government-imposed status. - [ ] Lender negotiations. - [ ] Court orders. - [ ] Market conditions. > **Explanation:** Government or IRS tax liens, for instance, automatically have priority regardless of when they are recorded. ### A subordination agreement changes lien priority by: - [ ] Voiding existing liens. - [ ] Establishing a later lien as superior. - [x] Establishing one debt as ranking behind another debt. - [ ] Combining multiple liens into one. > **Explanation:** A subordination agreement allows one debt to rank after or down in priority behind another debt. ### What is generally required to qualify as a prior lien? - [ ] Being validated by a local government. - [ ] Larger loan amount. - [x] First to be recorded. - [ ] Secured by the IRS. > **Explanation:** The first lien to be recorded generally qualifies it as a prior lien, giving it priority over subsequent liens. ### Which type of lien usually comes second after a mortgage in priority? - [ ] Mechanic’s lien. - [ ] Judgment lien. - [ ] Tax lien. - [x] Home equity lien. > **Explanation:** A home equity lien generally follows the primary mortgage lien in the line of priority. ### Which is an example of a junior lien? - [ ] First mortgage. - [ ] Tax lien. - [ ] Water bill lien. - [x] Home equity loan. > **Explanation:** A home equity loan is typically a junior lien, as it usually follows the original mortgage lien in priority. ### What primarily determines the rank of a lien? - [ ] The financial stability of the borrower. - [ ] Amount of loan. - [ ] State of residency. - [x] Date of recording. > **Explanation:** The date when the lien is recorded primarily determines its priority rank among other liens.