In a mortgage loan transaction, perfecting a lien is the legal process that establishes a lender's priority against other creditors and gives it the right to foreclose if you don’t make your payments. Read on to learn more about property liens, how a lender perfects its lien, lien priority, and how lien priority affects who gets paid in a foreclosure.
Promissory Notes and Mortgages
To understand what it means to perfect a lien, you first must understand the documents involved in a mortgage loan transaction. When you take out a loan to purchase a property, you will sign two documents:
- the promissory note, and
- a mortgage or deed of trust.
The promissory note is your promise to repay the money you borrowed. (Learn more about promissory notes.)
In addition, depending on where you live, you will also sign either a mortgage or a deed of trust (collectively referred to as a “mortgage” in this article). The mortgage is the document that pledges the parcel of property as security for the debt and creates a lien on the property. (Learn more about the difference between mortgages and deeds of trust.)
What Is a Property Lien?
A property lien is a claim on your home that acts as a guarantee ensuring that you pay back the debt. (Learn more in Nolo's article What Is a Property Lien?)
Basically, your home is collateral for the loan. If you don’t make your mortgage payments, the lender will repossess the home through a process called foreclosure to repay the amount you borrowed. (Learn more in our Foreclosure area.)
The Lender Must Perfect the Property Lien
In order to establish the right to foreclose and protect its position against other property liens (for example, other mortgages, judgment liens, and IRS liens), the lender must take steps to "perfect" the property lien. (Learn more about the different types of property liens in Nolo’s Property and Judgment Liens area.)
How the Lender Perfects its Lien
To perfect its lien, the lender must record or file the mortgage with the appropriate legal authority. This typically means recording the mortgage in the land records in the county where the property is located.
The purpose behind the recording requirement is twofold:
- It serves as a public declaration of the lender's lien against the real estate. (This gives other parties, such as potential purchasers and other lenders, notice of the lien.)
- Once a lender perfects its lien by recording the mortgage, this establishes its priority.
Lien priority determines the order in which creditors get paid in a foreclosure. If a lien has priority over another lien, it gets paid before the other lien. Based on the legal rule known as “first in time, first in right,” liens generally have priority in the order that they are recorded in the land records office.
However, as with most legal rules, there are exceptions to the first in time, first in right rule. Depending on state law, certain liens such as property tax liens, mechanic’s liens, and homeowners’ association and condominium association assessment liens can have priority over previously recorded liens. (Learn more about lien priority and who gets paid first in a foreclosure sale in Nolo’s article What Is Lien Priority?)