REAL ESTATE PRINCIPLES

RE101
Types of Liens and Priority

Encumbrance: An Encumbrance is a nonpossessory interest in real property,

held by someone other than the property owner. It is either a financial burden or a
nonfinancial burden on the property owner’s title.

Lien: A financial encumbrance. It’s a security interest that gives the lienholder
the power to foreclose, forcing the sale of the property so that the debt can be paid.
A lien is either voluntary or involuntary, and either specific or general.

Mortgage: A mortgage is a voluntary, specific lien. It is created by contract

between the property owner and a lender when the property is offered as security
for a loan.

Deed of Trust: Like a mortgage, a deed of trust is a voluntary, specific lien

that makes the property security for a loan. The key difference between a
mortgage and a deed of trust concerns the method of foreclosure.

Mechanic’s Lien: A mechanic’s lien (or construction lien) is an involuntary,

specific lien that can be claimed by someone who provides labor or materials for
improvements on real property. The priority of a mechanic’s lien is determined by
the date work began on the construction project.

Judgment Lien: A judgment lien is an involuntary, general lien held by

someone who was awarded a judgment in a lawsuit. It attaches to all of the
judgment debtor’s property in the county or counties where an abstract of
judgment has been recorded.

Attachment Lien: In a lawsuit, the plaintiff may request an attachment lien

against the defendant’s property. The lien prevents the defendant from selling the
property during the trial to avoid paying any judgment the plaintiff might win.

Tax Lien: Taxation results in various types of involuntary liens. Property

taxes and special assessment liens are specific liens against the taxed property.
IRS liens are general liens against ALL of the delinquent taxpayer’s property.
Property tax liens and special assessment liens are exceptions to the “First to
record rule”. They are superior to all other liens.

Lien Priority: The rules of lien priority determine how the proceeds of a
foreclosure sale will be applied if they are insufficient to pay off all the liens
against the property.

Voluntary Liens: The lien priority of mortgages and deeds of trust is

generally established by recording date. “First to record is first in right”.

Surplus: In a foreclosure, there may be a surplus left over after the proceeds
have been used to pay foreclosure costs and all of the liens against the property.
The surplus belongs to the debtor.

Homestead Exemption: A homestead is an owner-occupied dwelling.

The homestead exemption protects a limited amount of the property’s value against
foreclosure of judgment liens and attachment liens. When a homestead is sold, the
sale proceeds are protected (up to the exemption amount) for up to six months after
the sale, giving the former owner a chance to reinvest those funds in another house.