Refinancing your home with a lien is possible, but it introduces certain complexities and conditions that borrowers need to navigate. Whether a lien stems from unpaid debts, contractor services, or judgments, it can impact the process by complicating your loan approval or changing the terms offered by lenders.

How to Refinance a Lien on Your Home

refinance lien1. Lien Clearance Requirement

Most mortgage lenders prefer or require that any liens against the property be cleared before refinancing. This is because liens take priority over the new mortgage, making them a risk to the lender. If the lienholder is unwilling to release the lien, the borrower might need to negotiate repayment or settlement as a condition for refinancing approval.

2. Impact of Different Lien Types

  • Tax Liens: Tax liens are serious encumbrances on your property. In many cases, lenders will not proceed with a refinance until these are resolved because the government’s claim on your property takes precedence.
  • Judgment Liens: A judgment lien placed by a creditor can also complicate refinancing. The borrower can negotiate a payoff or payment plan with the creditor, potentially reducing the lien amount to facilitate refinancing.
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  • HELOCs and 2nd Mortgage Subordination Issues: If you have a home equity line of credit or second mortgage, the lender may need to approve the subordination of the home equity line of credit, meaning it remains secondary to the new mortgage. Many people choose to complete a HELOC refinance because the 2nd mortgage lenders rarely agree to subordinate in a timely manner. This can cause delays or complications if the HELOC lender refuses to subordinate​.

3. Options for Refinancing with a Lien

  • Cash-Out Refinance: In some cases, homeowners may use a cash-out refinance to pay off the lien, effectively consolidating the debt into their new mortgage. Consider conventional and FHA cash out refinancing eligibilities first.
  • Home Loan Programs with Flexibility: Certain government-backed loan programs, such as FHA or VA loans, might offer more leniency for borrowers dealing with liens, depending on the situation.
  • Negotiating with Creditors: Before refinancing, homeowners should contact lienholders to negotiate a settlement. This could involve paying off the debt entirely or reaching an agreement to release the lien.

4. When Bankruptcy May Be an Option

For homeowners facing multiple liens and financial challenges, filing for Chapter 7 or Chapter 13 bankruptcy may help discharge or restructure debts. However, bankruptcy will impact your ability to refinance in the short term, as lenders generally require a waiting period following discharge or repayment plans​.

Can you refinance your mortgage with a tax lien on your home?

If a federal tax lien is placed on your home, you’ll typically need to address the lien before proceeding with a sale or refinance. Several strategies are available to clear the lien, but it can complicate the refinancing process.

While refinancing with an active tax lien is not impossible, it presents significant challenges. To move forward, you must apply for a Certificate of Subordination of Federal Tax Lien using IRS Form 14134. This certificate allows a new lender to assume a higher priority than the federal lien, increasing the chance of securing refinancing approval. However, even with subordination, approval is not guaranteed, as each lender has its own risk assessment process.

The lien subordination application requires detailed information about the property, the lien, and the refinancing plan. Once submitted, the IRS will review the application to determine whether the refinancing aligns with their guidelines. If approved, this action does not eliminate the lien but reorders its priority beneath the new loan, ensuring that the government retains its right to claim proceeds from future sales or other transactions involving the property.

Because the process is complex, working closely with both a financial advisor and your lender is essential to improving the likelihood of success.

Takeaway on Home Refinancing with Liens

While refinancing with a lien on your property is challenging, it is not impossible. Success often depends on early planning, negotiation with lienholders, and finding the right lender willing to accommodate your situation. Consulting with a financial advisor or mortgage expert can also help you understand your options and ensure a smoother refinancing process.

References

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