A lender must perfect its lien by filing it with the appropriate agency or authority, such as in the county land records.
If a lien is "perfected," the creditor (such as a mortgage lender) has established its priority in the encumbered property regarding other creditors.
"Perfection" is generally accomplished by taking specific steps that the law requires to notify other lenders and creditors about the lien. For example, the creditor might have to record its lien in the county records to perfect it.
How Mortgage Loans and Liens Work
When buying residential real estate, most people sign two documents:
- a promissory note, and
- a mortgage or deed of trust.
The "promissory note" contains your promise to repay the money you borrowed.
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.
What Does "Perfected" Mean in Real Estate?
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.
How the Lender Perfects Its Lien
To perfect its lien, the lender must record or file the mortgage with the appropriate legal authority. Usually, the mortgage is recorded in the land records in the county where the property is located.
Again, the purpose behind the recording requirement is twofold:
- It serves as a public declaration of the lender's lien against the real estate. Recording the document gives other parties, such as potential purchasers and other lenders, notice of the lien.
- Once a lender perfects its lien by recording the mortgage, it establishes the lien's priority.
How Lien Priority Works
"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're recorded in the land records office.
But as with most legal rules, some exceptions to the "first in time, first in right" rule are in place. Depending on state law, certain liens such as property tax liens, mechanic's liens, and homeowners' association and condominium association assessment liens get priority over previously recorded liens.
Talk to a Lawyer
If you're facing a foreclosure and want to learn more about lien priority or any other issue related to foreclosure, consider talking to a foreclosure attorney.
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