A lien is a legal claim on a property. When a home has more than one mortgage, the first lien gets paid first. The second lien only gets what's left.
That order matters a lot when something goes wrong.
How lien position works
Liens usually line up in the order they were recorded with the county. The first mortgage recorded is usually the first lien. A home equity loan taken out later is usually the second.
If the home is sold in foreclosure, the money goes to the first lien until it's paid in full. Only then does the second lien get anything.
An example
A home sells at foreclosure for $120,000. The first mortgage is owed $100,000. The second is owed $40,000.
- The first lien gets its full $100,000.
- The second lien gets the $20,000 that's left, and loses the other $20,000.
And if the first lien holder forecloses, the second lien can be wiped out completely. The second has to keep the first current, or pay it off, to protect itself.
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Why second liens are riskier
- They get paid last.
- They can be wiped out by a first-lien foreclosure.
- To protect their spot, they may have to pay the first lien.
- The home may not have enough value left to cover them.
Second liens sell at bigger discounts for a reason. Some investors do well with them. But the risk is real.
Why I only buy first liens
I buy first-lien notes only. When lender money is behind a note, I want it at the front of the line. You can see it in my buy box.
Watch for these
Some things can jump ahead of a first mortgage, like unpaid property taxes and, in some places, certain HOA dues. Always check for them. Here's more on the biggest risks in note investing.
Common questions
What is a first lien mortgage?
The mortgage that gets paid first when a property is sold or foreclosed. It's usually the first one recorded with the county.
Can a second mortgage be wiped out?
Yes. If the first lien holder forecloses, the second lien can be wiped out if the sale doesn't bring enough to pay it.
Can anything get ahead of a first mortgage?
Unpaid property taxes usually can. In some states, certain HOA dues can too. Check for both before you buy or lend.
Written by Larry Hoffman
Managing Member of LJH Investments, LLC in Madison, Indiana. In real estate since 2006, with 300+ mortgage notes bought. Author of Mailbox Money Retirement.
General education, not legal, tax, or investment advice. Talk with your own attorney and tax adviser about your situation. All investing has risk, including loss of principal.