What's a Junior Lien Holder?
When you take out a mortgage loan, the lender acquires a lien or financial stake on your property that he can attempt to maintain by foreclosure if you default on the mortgage. If you take out a second mortgagealso called a home equity loanthat lender becomes a junior lienholder, with the initial mortgage as mature. A third mortgage would create a third lienholder, junior to the first two, and so on.
If your residence is sold in foreclosure auction, the sale proceeds are distributed in order of seniority, the Nolo legal website says: The senior lienholder has to be paid off in full prior to the lienholder receives some money. When there’s more than one junior, they will be compensated based on which lien has been filed . It’s not unknown for the senior lienholder to put in an auction bid that’s just enough to pay its debt, according to California lawyer Brian Irion, carrying over the land and leaving nothing for the other lienholders.
A junior lienholder has the right to begin foreclosure herself, but the senior lienholder will still be paid . If the property owner needs a brief sale–selling the house until it’s foreclosed on, in hopes of obtaining a much better deal–all of the lienholders must agree to this. A 2010 Realty Times article says that many junior lienholders’ are preventing short sales by insisting on a larger share of the profits than mature holders will agree to.
Senior lienholders in certain states may not have to notify juniors that they have begun foreclosure: A California appeals court ruled in 2010 that trustees in non-judicial foreclosures–the normal procedure in a number of states–are not required to identify or locate junior lienholders. In that particular instance, California’s McBride Law says, the money remaining after the senior lienholder was paid was returned to the homeowner, and the junior liens were wiped out. The court ruled that it’s up to the lienholders to ask a notice of default and take action after they receive you.
Lenders will sometimes write third or second mortgages for more than the equity of your home–the value of your home less what you owe on the mortgagein return for higher rates of interest. The part of the loan that’s higher than the equity is unsecured, Nolo says, meaning it will not be paid off even if the lender forecloses. The lienholder does, however, have the choice to sue you to get the money.
There is one circumstance under which the sequence of seniority changes, the Foreclosure University website says, and that’s when government files a lien for unpaid property taxes. Property taxes are paid .