Creditors who have rights in real estate are called lienholders.
They might gain those rights through other mortgages, judgment liens, tax liens, mechanics’ and materialmen’s (M&M) liens, or as a result of divorce. By and large, with the exception of real estate taxes and possibly M&M liens, any lien that was recorded after the mortgage was foreclosed will be canceled by the foreclosure.
Most states give a super priority to real estate tax liens. This is a lien for unpaid real estate taxes, not to be confused with IRS tax liens. Usually, real estate tax liens stay on property no matter what happens. Mechanics’ and materialmen’s liens arise because of unpaid bills after work is performed for the benefit of the real estate.
Many states allow the mechanics’ and materialmen’s lien to be filed after a mortgage but still give superior rights to the mortgage lender. If that happens, the lienholder must usually take steps to foreclose on the lien within a very short period of time, usually six months, or lose the lien.
In the following example, I have illustrated which liens will survive a foreclosure. Even after a foreclosure sale, the liens that survive will still be on the property. That lienholder can then conduct its own foreclosure and take the property away from the successful buyer without paying any compensation to the buyer.
Jan. 1 Mortgage to 1st Federal Lenders
Feb. 1 Mortgage to 2nd Federal Lenders
March 1 IRS lien
July 1 Judgment lien by hospital creditor Sept. 1 New roof installed by Rex Roofers Oct. 1 Real estate taxes are due Nov. 1 2nd Federal forecloses; you buy
Dec. 1 Rex Roofers files lien for unpaid bill
It is very likely that your property will still be subject to the 1st Federal Lenders mortgage, the real estate taxes, and the Rex Roofers lien for the unpaid roofing bill. If 2nd Federal Lenders did not give the proper specialized written notice to the IRS, that lien will also remain, even though this company filed after the 1st Federal Lenders mortgage.
Because of the danger of liens remaining on property after a foreclosure, it is extremely important to order a title commitment before obligating yourself to buy the property. A title commitment can be obtained through almost any real estate closing company. Ask a real estate agent for some names if you do not already know a company.
The title commitment is much less expensive than a full title policy. The title commitment is the insurance company’s commitment to issue a title policy once closing takes place and the deed to you has been recorded. When ordering, you should advise the company that you want a commitment for title insurance after a particular lender has foreclosed. The title commitment will list all other possible claimants to the property and require that those parties’ claims be released as a condition of issuing title insurance. This will give you an early warning of postforeclosure problems.
Learn about negotiating with lienholders. It can be done successfully, but first you have to know who they are ahead of time. Once you buy the property, it is probably too late to start negotiating because you are no longer in a position of strength.