Can I Refinance My Home With A Lien On It? Yes!

Yes, it is possible to refinance your home even if there is a lien on it. However, the process can be more complex, and your options might be limited depending on the type and nature of the lien.

Can I Refinance My Home With A Lien On It
Image Source: www.investopedia.com

Navigating Mortgage Refinancing with Existing Liens

Owning a home is a significant achievement, and refinancing your mortgage can be a powerful tool to save money, access cash, or simplify your finances. But what happens when there’s a lien on your property? Many homeowners believe a lien automatically blocks any refinancing attempts. This isn’t always true. While a lien certainly complicates the process, it doesn’t necessarily mean you can’t refinance your home. The key lies in understanding how lenders view these encumbrances and what steps you can take.

What is a Lien?

A lien is a legal claim against a property, usually to secure payment of a debt or obligation. It essentially means that if the debt isn’t paid, the lienholder can potentially seize and sell the property to satisfy the debt. Common types of liens include mortgages, property tax liens, mechanic’s liens, judgment liens, and HOA liens.

How Liens Affect Refinancing

Lenders refinance mortgages because they want to be in a secure position. When a lien exists on your property, it represents a claim that could be ahead of, or in parallel with, the lender’s claim. This makes refinancing riskier for the new lender.

Here’s why:

Priority of Claims: Liens are typically paid in the order they are recorded. A primary mortgage has the first claim. If another lien is recorded before a new mortgage, it has priority over that new mortgage. However, most refinancing involves replacing your existing primary mortgage with a new one, and the new loan will take the first position. The issue arises with other liens.
Reduced Equity: Liens represent outstanding debts, which reduce the amount of equity you have in your home. Equity is the difference between your home’s market value and what you owe on your mortgage. Lenders look at your equity to determine how much risk they’re taking.
Lender Hesitation: A lien signals an outstanding debt. Lenders want to ensure their loan is the primary or a senior secured debt. Many lenders will not proceed with a refinance if there are other significant liens on the property that are not being satisfied.

Types of Liens and Refinancing Possibilities

The type of lien on your property significantly impacts your ability to refinance.

1. Existing Mortgage Liens

This is the most common scenario. When you refinance your primary mortgage, the new loan pays off the old mortgage. The lien from the old mortgage is released, and the new mortgage lien takes its place as the first lien on the property. So, if your only lien is your current mortgage, refinancing is standard procedure.

2. Subordinate Liens (Second Mortgages, HELOCs)

If you have a mortgage refinancing with subordinate lien on your property, such as a second mortgage or a Home Equity Line of Credit (HELOC), refinancing your primary mortgage can still be possible.

Option A: Pay Off the Subordinate Lien: The most straightforward way to refinance your primary mortgage is to use some of the cash-out from the refinance to pay off the subordinate lien. The refinance lender will require proof that the subordinate lien is satisfied and released before they fund the new loan.
Option B: Keep the Subordinate Lien: In some cases, especially with a second mortgage refinance, you might be able to refinance your primary mortgage while keeping the subordinate lien in place. This is less common and depends heavily on the new lender’s policies and your equity. The new lender will still want their loan to be the first lien. If they agree to the subordinate lien remaining, they will be the first lienholder, and the existing subordinate lien will remain second. This requires the new lender to be comfortable with the combined loan-to-value (CLTV) ratio and your creditworthiness.

3. Home Equity Loan with Tax Lien

If you have a home equity loan with a tax lien, refinancing your primary mortgage becomes more challenging.

Tax Liens Take Priority: Property tax liens are often considered “super-priority” liens, meaning they can take precedence over even existing first mortgages. This makes lenders extremely cautious.
Resolution Required: To refinance your primary mortgage, the tax lien must be addressed. This usually means paying it off in full with the proceeds from your refinance. The refinancing lender will require the tax lien to be released from the title. If you’re looking to access equity, this becomes difficult if the tax lien consumes all your available equity or more.

4. Title Loan on Home Equity

A title loan on home equity is a type of short-term, high-interest loan secured by your home’s equity. These loans often come with predatory terms and can be very difficult to deal with.

High Risk for Refinancing Lenders: Lenders offering traditional refinances are very unlikely to approve a refinance if a title loan is outstanding. The terms are often aggressive, and the lien could be structured to be very difficult to remove.
Paying it Off is Key: The only realistic way to refinance your primary mortgage with a title loan outstanding is to pay off the title loan in full using the cash-out from your refinance. You’ll need to ensure the title loan company provides a clear release of their lien.

5. Private Mortgage Refinance with Judgment Lien

A private mortgage refinance with judgment lien is also a difficult scenario. A judgment lien is placed on your property when someone sues you and wins, and you don’t pay the judgment.

Court Order: A judgment lien is a court-ordered claim. Lenders will typically require that any judgment lien be paid off and released before they will issue a new mortgage.
Negotiation and Settlement: You might be able to negotiate a settlement with the judgment holder for a lesser amount, but the funds would need to come from your refinance. If the judgment lien is substantial, it could significantly impact your ability to refinance.

6. VA Loan Refinance with Junior Lien

For veterans using VA loans, a VA loan refinance with junior lien can be managed. The VA has specific guidelines, but generally, junior liens (like second mortgages or HELOCs) are permissible if the VA-guaranteed loan remains the first lien.

VA Loan Requirements: The VA wants to ensure its guarantee is in the primary position. If you are refinancing your VA loan, the new VA loan will take over the first lien position. The existing junior lien may be allowed to remain in place, provided it doesn’t violate VA regulations and the combined loan-to-value ratio is acceptable. However, often, the refinance will aim to consolidate debts, meaning the junior lien would be paid off.

7. FHA Loan Refinance with Mechanic’s Lien

An FHA loan refinance with mechanic’s lien presents challenges. A mechanic’s lien is filed by contractors or suppliers who have not been paid for work done on your property.

Title Insurance Issues: FHA lenders rely on title insurance. A mechanic’s lien can prevent the issuance of a clean title insurance policy, which is a requirement for FHA loans.
Resolution: The mechanic’s lien will almost certainly need to be paid off and released before an FHA refinance can be approved. This often means using cash from the refinance to settle the debt.

8. USDA Loan Refinance with HOA Lien

USDA loan refinance with HOA lien also requires attention. Homeowners Association (HOA) liens are typically placed on a property for unpaid HOA dues and assessments.

HOA Lien Priority: The priority of HOA liens varies by state. In some states, HOA liens can have a higher priority than even a first mortgage, making them a significant concern for new lenders.
HOA Resolution: You will likely need to pay off any outstanding HOA dues and have the lien released. If the HOA lien is substantial, it may reduce your equity to the point where refinancing is not feasible.

Steps to Refinance with a Lien

If you have a lien on your property and want to refinance, here’s a general approach:

Step 1: Identify All Liens

Order a Preliminary Title Report: This is the most crucial first step. A title company will research public records to identify all recorded liens and encumbrances against your property. This report will list the nature of each lien, the lienholder, the recording date, and the amount owed (if available).
Review Your Mortgage Documents: Double-check your existing mortgage statements and any agreements for second mortgages or HELOCs.

Step 2: Determine the Type and Priority of the Lien

As discussed, the type of lien matters. A first mortgage is standard. Other liens will require specific handling.

Step 3: Assess Your Equity

Home Valuation: Get a current market appraisal of your home. You can do this by asking a real estate agent for a Comparative Market Analysis (CMA) or hiring a professional appraiser.
Calculate Equity: Subtract the total of all outstanding debts secured by your property (including your current mortgage and any other liens) from your home’s current market value.

Step 4: Contact Your Mortgage Lender or a New Lender

Be Transparent: Discuss your situation honestly with your current lender or potential new lenders. Inform them about all existing liens.
Inquire About Their Policies: Ask specifically how they handle refinancing with the type of lien you have. Some lenders may have stricter policies than others.

Step 5: Address the Lien

This is where the actual resolution happens.

Pay Off the Lien: The most common requirement is to pay off the lien. If you’re doing a cash-out refinance, you can use a portion of the proceeds to satisfy the outstanding debt. Your refinance lender will ensure the lien is paid and released before or at closing.
Negotiate and Settle: For certain liens, like judgment liens, you might be able to negotiate a settlement for a reduced amount. This requires proving you cannot pay the full amount and negotiating in good faith.
Refinance with the Lien in Place (Rare): As mentioned, for subordinate liens, it’s sometimes possible to keep them if the new lender agrees and your equity is sufficient. This is often more feasible with portfolio lenders who have more flexibility than large national banks.

Step 6: Refinance Application and Approval

Once you have a plan to address the lien, you can proceed with the refinancing application. This will involve the usual steps:

Credit Check: Your credit score will be a major factor.
Income Verification: Proof of income and employment will be required.
Debt-to-Income Ratio: Lenders will assess your DTI.
Appraisal: A new appraisal of your home will be conducted.
Title Search and Insurance: This process will reconfirm the status of all liens and ensure the new mortgage is properly recorded.

Specific Scenarios and Considerations

Let’s delve deeper into how different lenders and loan types handle liens.

Refinancing with a Home Loan Modification with Lien

A home loan modification with lien typically refers to modifying your existing mortgage, not refinancing with a new lender. If you’re seeking a modification to lower your monthly payments and you have other liens, the modification process usually focuses on the primary mortgage. The other liens would likely remain unaffected unless the modification agreement specifically addresses them, which is uncommon. If you want to refinance your primary mortgage and have other liens, you’re looking at a standard refinance, not a modification.

Mortgage Refinancing with Subordinate Lien: Lender Perspective

When considering mortgage refinancing with subordinate lien, lenders evaluate the Combined Loan-to-Value (CLTV) ratio. This is the sum of all loans secured by your property, divided by the home’s value.

CLTV Example:
- Home Value: $400,000
- Existing First Mortgage: $200,000
- Second Mortgage (Subordinate Lien): $50,000
- New Refinance Amount: $220,000 (paying off the first mortgage and covering closing costs)
- CLTV with Second Mortgage: ($220,000 + $50,000) / $400,000 = 270,000 / 400,000 = 67.5%

Most lenders have maximum CLTV limits (e.g., 80% or 90%) for refinances. If your CLTV is within their limits and your credit is good, they might allow the subordinate lien to remain. However, many lenders will prefer the subordinate lien to be paid off.

Equity Release with Existing Lien: The Challenges

Equity release with existing lien is difficult because the lienholder has a claim on the equity. Whether you’re considering a cash-out refinance, a home equity loan, or a HELOC, the presence of another lien complicates your ability to access your home’s equity.

Refinancing: As discussed, the cash-out from a refinance can pay off existing liens.
New Home Equity Loan/HELOC: If you want to take out a new home equity loan or HELOC and you already have liens on your property, the lender will assess your total debt against your home’s value. The new loan will be subordinate to your primary mortgage. If you have a second mortgage or a significant tax lien already, getting a third lien might be impossible due to equity limits.

Private Mortgage Refinance with Judgment Lien: Legal Ramifications

A private mortgage refinance with judgment lien often involves private lenders or investors. These lenders can sometimes be more flexible than traditional banks, but they also want to mitigate risk. A judgment lien is a court order, making it a strong claim.

Impact on Credit: The original debt that led to the judgment lien will have negatively impacted your credit score significantly. This makes obtaining any new loan difficult.
Lender Due Diligence: A private lender will conduct thorough due diligence, including verifying the exact amount and status of the judgment lien. They will likely require it to be satisfied.

Government-Backed Loans and Liens

Government-backed loans like FHA, VA, and USDA have specific rules:

FHA Loan Refinance with Mechanic’s Lien: FHA loans are insured by the Federal Housing Administration. They require a clear title, meaning mechanic’s liens must be addressed. The FHA is very strict about property condition and title clarity.
VA Loan Refinance with Junior Lien: VA loans are guaranteed by the Department of Veterans Affairs. As mentioned, the VA may allow junior liens in certain scenarios, but their primary concern is the security of the VA-guaranteed portion of the loan.
USDA Loan Refinance with HOA Lien: USDA loans are for rural properties. The USDA’s primary focus is ensuring the property is safe, sanitary, and that their loan is secure. HOA liens, especially if they have high priority, can jeopardize the loan’s security.

Can You Refinance if the Lien is Invalid?

If you believe a lien on your property is invalid (e.g., it was filed in error, the debt was already paid, or the statute of limitations has passed), you may need to take legal action to have it removed.

Consult an Attorney: Speak with a real estate attorney specializing in property law. They can advise you on the validity of the lien and the process for challenging it.
Lien Release: If the lien is indeed invalid, you can pursue a formal release from the lienholder or through the courts. Until the lien is officially removed from the public record, lenders will treat it as valid.

Benefits of Refinancing with a Lien

While challenging, successfully refinancing with a lien can still offer significant benefits:

Lower Interest Rates: Reduce your monthly payment by securing a lower interest rate on your primary mortgage.
Access to Cash: If you opt for a cash-out refinance, you can use the funds for home improvements, debt consolidation, or other financial needs.
Debt Consolidation: Consolidate high-interest debts into your mortgage, potentially lowering your overall interest payments and simplifying your finances.
Change Loan Terms: Switch from an adjustable-rate mortgage to a fixed-rate mortgage for payment stability.

Potential Drawbacks and Risks

Higher Costs: The process can be more expensive due to additional legal work or fees associated with clearing the lien.
Limited Lender Options: You may find fewer lenders willing to work with you.
Reduced Refinance Amount: If the lien significantly impacts your equity, you might not be able to borrow as much as you hoped.
Risk of Foreclosure: If you cannot manage the payments on the new loan, especially if you’ve taken on more debt, you risk foreclosure.

Frequently Asked Questions (FAQ)

Q: What happens to my existing lien if I refinance?
A: If you refinance your primary mortgage, the lien from your old mortgage is paid off and released. The new mortgage lien takes its place as the first lien. Any other liens on your property must typically be paid off or, in rare cases, allowed to remain in a subordinate position.
Q: Can I get a cash-out refinance with a tax lien?
A: It is very difficult. Tax liens usually have priority, and lenders will require them to be paid off. If the tax lien is substantial, it may consume too much of your equity, preventing you from accessing cash through a refinance.
Q: Will a judgment lien prevent me from refinancing?
A: Almost always. Lenders require judgment liens to be satisfied (paid off) before approving a refinance.
Q: How can I remove a lien before refinancing?
A: The most common way is to pay off the debt associated with the lien. If the lien is invalid, you may need legal assistance to have it formally removed from your property’s title.
Q: What if the lien amount is more than my home’s value (underwater)?
A: If your home is worth less than what you owe on your mortgage, plus any other liens, you likely won’t be able to refinance through traditional means. In such cases, you might explore options like a loan modification or a short sale, though these don’t involve refinancing.
Q: Does a HOA lien have priority over my mortgage?
A: This varies by state. In many states, HOA liens can indeed have priority over existing mortgages, making them a significant obstacle to refinancing. You must check your state’s laws and your HOA agreement.

Conclusion

Refinancing your home with a lien on it is possible, but it’s not a simple or guaranteed process. The success of your refinance hinges on the type of lien, the amount owed, your home’s equity, and the lender’s specific policies. Transparency, thorough research, and a willingness to address the existing lien are paramount. By understanding the hurdles and the available solutions, you can navigate the complexities and potentially achieve your refinancing goals.