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What Is a First Lien?

C. Mitchell
C. Mitchell

A first lien is a primary, or original, lien executed against a specific property or income. Liens are legal instruments that essentially give one party the right to possess or hold another’s property in anticipation of the settlement of a debt. Mortgages are very common examples of liens. In most cases, the first lien is held by the original lender. This debt usually takes precedence over all liens that come after it, and is widely regarded as the most advantageous sort of lien to hold.

Liens have become ubiquitous in most parts of the world, but draw their origins from the English common law system. Common law usually defines a lien as an interest that a lender has in a certain piece of property. In most cases, that property has been offered as collateral for a loan, as a means of secured debt financing. The lien allows the lender an interest over the property that can be exercised in case of non-payment.

A mortgage is a common first lien.
A mortgage is a common first lien.

A person who wants to buy a house, for instance, may take out a loan from the bank to finance the purchase. The purchasers are the owners of the house, but the house is subject to a lien that is held by the bank. If the loan amount is not repaid, the bank can exercise its lien and repossess the house. The same is true for cars, boats, and any other major purchases or loans.

If a loan amount on a mortgage is not repaid, a bank can exercise its lien and repossess the house.
If a loan amount on a mortgage is not repaid, a bank can exercise its lien and repossess the house.

Designating a “first lien” really only becomes important when more than one security interest is at play. This is most common when a buyer seeks to refinance a purchase, either by taking out a second mortgage or using the property as a security interest on an additional loan. Such an arrangement means that there are two lien holders on record. The original, or first, lien holder is known in law as holding the superior right, which means that his or her interest must be paid off before any later liens are settled.

Holding a second or third lien is usually considered somewhat disadvantageous. A first lien holder can usually be relatively sure that payments will either be made or the property repossessed. Secondary lien holders often have more to worry about, as a defaulter may not be able to satisfy subsequent debts beyond the first lien. Most lenders try to account for this possibility in the original lending documents, either by requiring a secured bond or setting a high interest rate, but the risk can never truly be avoided.

The question of ordering liens becomes even more complicated when liens are not voluntary. A person who chooses to refinance a purchase intentionally takes out two loans, and the secondary lender should be aware, through title searches or otherwise, that a first lien exists. This is not always the case, however, and there are situations in which multiple parties may have reason to assert a property claim on their own.

A tax lien is a common example. In countries that assert national income or property taxes, citizens who do not pay may find their property or their wages encumbered with a lien by the taxation authority. The lien is essentially the government’s right to collect the taxes owed through any means, even sale of assets.

Mechanics’ liens usually come up in instances of home repair or remodeling, or major car repairs. Property owners who do not pay for services rendered may find that the repair technician has filed for a legal lien against the repaired property. This sort of lien usually gives the technician the right to collect the value of the services performed by possessing the property in its entirety.

Different jurisdictions have different ways of determining which of many liens takes the priority position. In most cases, the first lien in time — that is, the first to be filed, no matter by whom — is considered to be the first. Some legal systems have exceptions for government liens, or liens specifically contracted with the purchaser, however. Much depends on jurisdiction and local law.

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    • A mortgage is a common first lien.
      By: Cheryl Casey
      A mortgage is a common first lien.
    • If a loan amount on a mortgage is not repaid, a bank can exercise its lien and repossess the house.
      By: Pefkos
      If a loan amount on a mortgage is not repaid, a bank can exercise its lien and repossess the house.