What Is a Senior Lien?

Before you decide to buy property you should have a clear understanding of what a senior lien is and what implications it may have on the future stability of your finances. There are several components to the senior lien. Some, such as its role when you are buying your home, are not as clearly defined as you might think. Advance planning and thoughtful consideration will help you stay on top of things as you buy and eventually sell your home.

A senior lien is considered to be the first and primary mortgage on a property. Typically, this is the original loan amount and is secured by the value of the property. This amount will be paid first and only tax obligations can potentially interfere. Death does not wipe the lien clean. Inheritance does not void it. Only the sale of the secured item or payment in full will satisfy the senior lien.

There are times when a buyer does not have a down payment or is unable to pay closing costs. In many cases the bank will set one mortgage payment but in actuality there are two liens; one a senior for the bulk of the sale price and one a junior for the down payment and closing. The home buyer should always remember that the senior lien takes precedence even in this situation. If the house is sold later, none of the funding would go to the junior until the senior lien is satisfied. The homeowner would be in debt for any senior balance left, and then the junior or second mortgage.

As time passes, you will likely establish equity in your property and you might consider taking out a loan of credit on that equity. Be mindful that you should always consider your senior lien. Never borrow so much on equity that the senior lien would be at risk if you had a financial hardship. A default on your home equity loan can force your home into foreclosure even if you are up to date on your home mortgage payments. Then, the senior mortgage must be paid before the equity line.

The final perspective of a senior lien relates to judgments. Judgments are court rulings against you for a financial amount. If you cannot pay the judgment, the court will place a debt against your home. When you sell your home, all must be paid. Judgments are paid after your first and second mortgages or equity loans. However, there are also senior liens in the form of judgments. In the case that you have multiple judgments against you, the oldest is considered senior and will be paid before the others.