A hard money loan is a special type of short-term financing that is secured by real estate. This could be either a residential or commercial property. Hard money loans typically need to take the first position on the property, and many do not allow any type of secondary claim on the property. For example, you cannot usually take out a second lien on the property when a hard money loan is in place.
You may be aware that a mechanic’s lien is linked to the property that you want to buy or is tied to a property that you are refinancing with a hard money loan. Understandably, you want to know how your hard money lender will address this lien or if it will simply be overlooked. A mechanic’s lien on a property does require special handling, but it can usually be addressed properly with a few easy steps.
What Is a Mechanic’s Lien?
A mechanic’s lien is typically filed by a contractor who has worked on the property in the past. This could be a roofer, a plumber, an architecture, an appraiser or anyone else who performed services specifically related to the subject property. A lien indicates that they completed work on the property and have not gotten paid within a reasonable period of time despite multiple requests. Liens are filed against a property to ensure that the contractor eventually does receive funds that are due. However, the lien can remain in place for years until action is forced on the property owner. This usually occurs when the property owner sells or refinances the property. A mechanic’s lien or any other type of lien against a property usually takes first position in terms of claims against a property. This means that a free and clear title cannot be conveyed until the lien is paid off.
In some cases, the payment situation is an oversight, and the property owner is more than happy to pay the amount due. However, in many cases, the lien is the result of a dispute between the property owner and the contractor. For example, the property owner may not be satisfied with the quality of the work or materials, but the contractor may state that the work has been completed as agreed. When the matter is disputed, it may still be a legal issue that is outstanding, or the property owner may refuse to pay the lien as a matter of principle.
How Does the Lender Know About Liens?
If you are aware of a mechanic’s lien filed against a property, you may wonder how a lender would know about the lien. The lien may show on your credit report, but the credit report may not indicate which property the lien is tied to. Some lenders, including hard money lenders, may require are all liens, judgments and collections showing on a credit report to be paid off before the loan closes. Other lenders may overlook these factors provided that the lien is not on the subject property.
A lien is filed against the title of the property. This means that the tile company will determine if any liens are filed against the subject property when doing its research. The lien will be listed in the title commitment as an exception against title. Hard money lenders and all other real estate lenders that need to take first position against the property will require the liens to be paid off prior to or at closing. Essentially, they need a clear title on the property before they can secure the property with their own loan.
How Are These Liens Released?
Releasing a title loan can sound like a major ordeal, but it usually can be handled relatively stress-free. As long as the property owner is agreeable to paying this debt, the payment may be made at closing in some cases. However, in some locations, the lien must be paid prior to closing so that the release of lien paperwork can be properly filed and certified ahead of time. The title company can usually assist you with this process, but you may need to actually pay the judgment or lien through the court or entity where the lien was filed. Be aware that you may not be able to obtain any type of secured financing on the property until the lien is paid off.
A mechanic’s lien on the subject property can be a delay in the overall loan process, but it is usually an issue that can easily be addressed if the property owner is agreeable to paying the lien. If the property owner is not agreeable to paying the amount owed in full, the loan process can come to a standstill. For more specific information about how your lender and title company will handle a mechanic’s lien in your location, contact them directly.