When providing financing to a real estate borrower, the lien position a lender has recorded with title is important because the lender with a first lien position has priority over all other claims against a real property. The lien position has direct implications on the lender’s rights and ability to recoup their money back should a borrower default on their loan obligation and the property goes into foreclosure.
Depending on the state and legal circumstances surrounding the lien on a real property, a lien can commonly be referred to as a mortgage, deed of trust, promissory note, or a security instrument. For the purpose of this article the term “mortgage” will be used to refer to all types of liens against a real estate property.
In general, a mortgage that is recorded first against a real property will have priority. This is a valuable position to have when a borrower obtains a second mortgage against their property, such as a line-of-credit secured by the property. Some borrowers even manage to place third lien positions against their property.
If a borrower is able to pay all their property related debt obligations in full and in a timely manner, then regardless of the position a lender has, each lender remains whole. However, if the borrower falls behind on their payments and a property foreclosure sale is enacted by one of the lenders with interest, then each lenders lien position will determine how much and if they are able to recoup the money owed to them. The lower a lien is in priority, the less likely it will be that a lender will be paid back in full after a foreclosure sale. This fact is the main reason a lender with a lower position would be less likely to enact a foreclosure sale in lieu of working out some kind of repayment plan with a borrower. In some cases, although the lender with first position is able to receive their money back, the sales proceeds were not enough to cover a second lien or any other lien thereafter. Because a foreclosure sale that involve multiple lenders can be complex, there are circumstances and negotiated agreements between the lenders which can determine the final outcome of how much each lender will ultimately receive.
Nevertheless, a lender with a first lien position is in the best position and has the advantage of receiving proceeds from a foreclosure sale before all other lenders.