What Happens to the Other Liens if You Foreclose?
Foreclosure wipes out your mortgage, but what about the other liens on the home? Do you still have to pay your second mortgage, mechanic’s liens, or property taxes? The laws on how liens on homes are handled vary a bit from state to state, but in most cases, here’s what happens:
1. The first mortgage, second mortgage, etc. Are generally wiped out. Usually, liens are given priority in the order they are recorded, so if the first mortgage holder forecloses, any liens that were recorded after the first mortgage are wiped out. They no longer exist. However, if a second mortgage holder forecloses, the first mortgage remains since it was recorded first.
2. Mechanics liens may or may not be wiped out. If the lien was recorded before the mortgage was, then the lien remains against the property and whoever buys the home at the foreclosure auction will have to pay the lien before they can sell it. If the lien was recorded after the mortgage, it will be wiped out. Some states use the date the work started instead of the recording date.
3. Tax liens are NOT wiped out. Oh, you know Uncle Sam will get his if he can. Property tax liens will stay with the property and will have to be paid before the new deed can be recorded. IRS liens are different. The IRS has the option to take the property and auction it to satisfy the lien. However, they have to pay the high bidder the amount they paid for the property if they do this.
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