With FHA loans and other mortgages, they are considered “secured.” That means the property can never change hands until and unless the secured liens are satisfied. The lien is part of the public record and will appear on a title report for the property on which the lien is secured. A mortgage, whether it be a first, second or even a third, has to be reckoned with when the owner sells or even refinances an existing first mortgage. What types of liens are there and how are they prioritized?
First Mortgage– A mortgage used to buy and finance a home where there is no other subordinate financing is a first lien mortgage. Any other subsequent mortgage will be subordinate to the first mortgage as the first mortgage was recorded prior to the second. It is in this regard the first mortgage is considered in a “superior” position compared to future mortgages.
Second Mortgage- As the name clearly implies, a second mortgage is one that is subordinate to an existing first mortgage lien and would be second in line to be paid off behind the first mortgage. A second lien can be recorded at a later date such as a home equity loan or the second mortgage can be part of the original purchase transaction in the instance of an 80-10-10 structure.
Mechanics Lien- A mechanic’s lien is considered superior to any existing mortgage(s). When a new home is being remodeled and a construction loan taken out, the builder first files a mechanic’s lien on the property. Once the work has been completed and paid in full, the builder will release the lien.
Judgment Lien- When a creditor is forced to sue a borrower in order to collect and the court awards in favor of the creditor, a judgment is recorded in public records. When the home is sold and the other creditors are paid and there is money left over, those funds will be used to pay the judgment. If there are no available funds, the judgment will still follow the borrowers until it is resolved.
Homeowner’s Association- In a condominium or PUD, the common areas are managed by a Homeowner’s Association, or HOA. The HOA is supported by HOA fees paid for by the individual unit owners. In some states, if an owner is delinquent on HOA dues the HOA can file an assessment lien. Such liens, again depending upon where the property is located, are considered superior to existing or future mortgages.
Tax Liens- Tax liens are placed on an individual’s personal property including a home. A property tax lien is filed when homeowners become delinquent on their property taxes and a federal income tax lien is placed when homeowners owe back income taxes. Taxes generally assume a superior position.
Okay, now considering tax liens, how do borrowers obtain an FHA loan with outstanding tax liens? The FHA loan is one of three government-backed home loans and is then a federal program. This is key here because income tax liens are placed due to nonpayment of federal income taxes in addition to property tax liens. If someone has an existing federal income tax lien and is considering using an FHA loan to finance the purchase, the tax lien will take priority. And here is where it gets a little tricky.
Because the tax lien was filed prior to the buyers buying and financing a home with an FHA loan, the existing tax lien has priority both in terms of when the lien was filed as well as the lien being outstanding federal debt. But that doesn’t necessarily stop the entire transaction. How can buyers proceed in such a circumstance?
The obvious choice is to pay off the lien entirely. But then if the borrowers had that much available cash to begin with it’s likely the lien would never have been recorded. Yet that’s still the first option. The second is to set up a repayment plan with the IRS followed by an agreed upon subordination agreement from the IRS.
The subordination agreement must be approved by the IRS and the buyers must provide written documentation regarding the new agreement. The agreement will show the total amount owed and the monthly payments agreed to. In return for this agreed upon plan, the IRS will also agree to be subordinate to the new FHA loan. In the instance of a refinance with an existing tax lien, with or without a repayment plan, the IRS must still agree to a subordination in writing. Further, with any repayment plan, the buyers must be able to show a minimum of three months of consecutive on-time payments to the IRS showing timely payment.
There are several moving parts as it relates to tax liens and FHA loans and while tax liens can certainly be a challenge it doesn’t completely stop FHA home loan eligibility. There are several steps that need to be taken but just because someone does owe back taxes and there is a lien filed doesn’t mean there aren’t options. There are.