Will the title of a foreclosure always be free from liens?
Foreclosure property sales are becoming increasingly attractive to homebuyers and to investors alike. The potential to pick up a bargain at between 50% and 90% of market value is enough to encourage normally sober and sensible people to step out onto a limb. However, by their very nature, foreclosure properties are rarely simple purchases and there can be a problem with liens on the title.
Foreclosed properties come about because the previous homeowner has defaulted on his or her payments on the mortgage. Although lenders are reluctant to foreclose in the current economic climate, there will come a time when the property will be seized and resold to offset costs and expenses. When people get into financial straits in this way, the mortgage is often not the only problem area. The property may also have been used as security against other loans or financing vehicles.
Buyers are always advised to research outstanding liens and encumbrances on a title by using the services of a local title company. Liens are security interests placed upon a property and are classified as either senior liens or junior liens. A senior lien is the first claim put on a property and is usually the claim made by the first mortgaging organization. All other junior or subordinate liens should be paid off as part of the sales process. If they are not then the new purchaser does not have clear title to the property and should not be able to organize title insurance.
Common subordinate liens are unpaid property taxes which, if they continue to be unpaid can lead to Tax Foreclosure. Most foreclosure documentation will state whether the sale is free of all junior liens and will state that the title is clear and unclouded. If this is not the case, potential purchasers should seek clarification before proceeding.
Junior liens are rarely significant sums of money. That is to say they are more likely to be a few thousand than a few tens of thousands and can be easily recouped if the property has been bought for resale but failing to clear the title can cause unnecessary delay and disruption to the buying process. Because of wrinkles like this in the buying process of foreclosures it is not an activity for the faint hearted and capital light.
It pays to have a few thousand dollars worth of savings available to deal with these unexpected occurrences as it is possible that your financing arrangements may not be willing to incorporate lien settlements. Having said that, it is always worth asking all parties involved whether the junior liens can be eliminated. The US Department for Housing and Urban Development (HUD) make it their business to simplify the foreclosure purchasing process, especially for owner occupiers, and they will work hard to ensure that title for the property is clear and unclouded.
Foreclosed properties are almost guaranteed to have liens and clouded title because of the financial situation of the defaulting mortgagor. Some selling organizations will clear the title prior to auction and others may not. Know where you stand and make the title check a standard part of your research.