A subordinate lien is any secondary lien that is placed on a person’s property.
This can include mortgaged property like a home or a fully owned property, like a vehicle.
In basic terms, a subordinate lien is any lien that has less of a payment priority than liens that have already been placed. It would be like having a first and second mortgage.
Mechanics, contractors, and other professionals are able to place subordinate liens when they can prove services were rendered without payment.
Almost All Liens Are a Subordinate Lien
Except for most tax liens and the first mortgage, every lien that is placed on a home or other property are considered to be a subordinate lien.
This means that they will be paid only when the primary liens in front of them are paid first. Let’s say there’s a $125,000 primary first mortgage, a $1,200 tax lien, and a $45,000 second mortgage on a property. The owner sells the property for $137,000. This means the tax lien, which has senior status in most jurisdictions, will be paid first. Then the primary first mortgage would be paid, totaling $126,200 in payments. This would leave $10,800 to be paid to the second mortgage, leaving the remainder of the lien outstanding.
Liens Don’t Always Go With the Debt Originator
Liens must be disclosed during the purchasing process, but the liens don’t necessarily have to be resolved by the original debtor.
It is possible to sell a home with a tax lien, for example, and the new property owner would then assume responsibility for the tax that is due.
Most transactions require that all liens be cleared before closing, but that isn’t a legal requirement.
Other debts can also create a subordinate lien.
Home improvements that remain unpaid, a mechanic’s bill for repairs that is not paid, or even materials for the home that are provided can all be a subordinate lien.
A contractor does not have to provide labor for services to be rendered.
Anyone who holds a property lien has the ability to foreclose upon that property.
This includes subordinate liens.
This is why taking care of them as soon as possible is a best practice.
Losing a home because of a $1,000 contractor subordinate lien could be financially devastating.
That’s why knowing what is allowed and what is not allowed is so important.