When you use your home as the collateral to get a loan, your lender will have a lien on your property. What does this mean and what are the risks involve when someone has a lien on your property? You need understand it before you make up your decision to pledge your home as the collateral to get money from a lender and you need to aware the consequences of failing to repay the money.
A lien is a legal claim or hold on some type of property that is use as collateral against monies from another person (lender). A lien usually exists when involve a relatively large amount of money such as second mortgages, business loans or loans against a vehicle title. It may keep the borrower from selling his/her property because the borrower won't be able to transfer the title of property when a third party has a lien against it.
When you want to borrow a large lump sum of money either to payoff your high interest debts or for your own business start up. The lender will normally ask for collateral which have about the same value of the loan apply. Home, car, boat, land and farm are few types of assets which you can pledge to the lender in exchange for a loan. In general, a lender prefers to put a lien on your home since it usually increases in value over time, which means the proceeds from your home's sale will be higher, and thus they're more likely to actually get paid back.
If you have property that carries a lien, the lender will have the right to force sell your property in order to collect back the money you owed them if you fail to make payment on you loan. On the other case, if you plan to sell off your property, the lien holder (which is the lender) must be paid before the title of property can be cleared and transfer to the buyer.
Now you understand that a lien is a legal claim by someone on a property. Hence if you are a buyer for a property, it is important for you to check out on the status of the property you are going to buy, ensure the property not carries any lien. You best way to check it is through a title search. The title search will indicates to you whether a property is carried a lien or not and it also will shows you the legal owner of the said property. Spending some of you time to do a title search will ensure you are buying a property that is free of lien and from a legal property owner. Otherwise, once you have paid the agreed upon price, you may discover that you still do not own the property free and clear.
In Summary
When a person uses his/her property as the collateral to get a loan from lender, the lender will have a lien, which is a legal claim on the property. Failed to pay the loan will result in a force sell of the property that carries the lien. When you pledge your property for a loan, make sure you have your repayment plan in place to avoid the consequences.
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