Foreclosure isn’t just about losing a home; it’s about money on the line. And if multiple people are owed money, the big question becomes: who gets paid first? In Ohio, lien priority decides that.
Whether you’re holding a mortgage, a judgment, or a mechanics’ lien, knowing where you stand could mean the difference between getting paid… or getting nothing.
How Do Liens Work in Ohio Foreclosures?
A lien is a legal claim against a property that serves as security for a debt.
When someone borrows money, say, for a mortgage, home improvement, or unpaid taxes, the lender or creditor often files a lien to protect their right to get paid. That lien attaches to the property, not the person, which means it stays with the property even if it changes hands.
In the context of foreclosure, liens matter because they stack up in a particular order. Think of it like a waiting line at the bank; whoever’s first in line gets paid first when the property is sold. The problem? Not every lien shows up at the same time, and some have special priority under Ohio law, no matter when they were filed.
The “First in Time, First in Right” Principle
Ohio generally follows the “first in time, first in right” principle for determining lien priority. This means liens are typically prioritized based on when they were recorded with the county recorder’s office. The first recorded lien has the highest priority, followed by the second, and so on.
For example, if you have a first mortgage recorded in 2015, a second mortgage recorded in 2018, and a judgment lien recorded in 2020, they would generally be paid in that order from foreclosure proceeds.
Exceptions to the General Rule
While “first in time, first in right” is the general rule, Ohio law establishes several important exceptions:
Tax Liens
Property tax liens typically have “super-priority” status, meaning they get paid before virtually all other liens, regardless of when they were recorded. This is why paying property taxes should always be a priority for property owners.
Construction and Mechanics’ Liens
Under Ohio Revised Code Section 1311.13, properly perfected mechanics’ liens can gain priority over liens recorded after construction began or materials were first delivered to the property, even if those other liens were recorded before the mechanics’ lien itself.
Purchase Money Mortgages
A purchase money mortgage (one that helps you buy the property) typically has priority over other liens that might attach to the property through the borrower.
How Mortgage Priority Works in Foreclosure
When a foreclosure occurs, the proceeds from the sale are distributed according to lien priority:
- First, the costs of the foreclosure sale are paid;
- Next, property tax liens are satisfied;
- Then, mortgage liens are paid in order of priority; and,
- Finally, any remaining funds go to junior lienholders and potentially the property owner.
Example Scenario
Let’s consider a property worth $300,000 with the following liens:
- Property taxes: $5,000
- First mortgage: $200,000
- Second mortgage: $50,000
- Judgment lien: $30,000
If the property sells for $270,000 at foreclosure, the distribution would be:
- Foreclosure costs: Estimated $5,000
- Property taxes: $5,000
- First mortgage: $200,000
- Second mortgage: $50,000 (paid in full)
- Judgment lien: $10,000 (partial payment)
The judgment lienholder would only receive $10,000 of the $30,000 owed, and the debt would remain unsecured after foreclosure.
Junior Lienholders in Foreclosure
When a senior lienholder forecloses, all junior liens are typically extinguished. However, this doesn’t mean the debts are forgiven. What happens to junior lienholders in an Ohio foreclosure?
Second Mortgages
If a first mortgage lender forecloses and the sale doesn’t generate enough funds to pay the second mortgage, the second mortgage lien is removed from the property. However, the debt itself remains. The second mortgage lender can:
- Sue for the remaining balance as an unsecured debt;
- Seek a deficiency judgment; or,
- Attempt to collect through other means.
Judgment Liens
Similarly, judgment liens may be wiped out in a foreclosure, but the underlying debt remains. Judgment creditors can:
- Pursue collection on the judgment debt;
- Attach liens to your other properties; or,
- Seek wage garnishment or bank account levies.
Mortgage Lien Priority and Refinancing
Refinancing a mortgage can affect lien priority. When you refinance a first mortgage, the new mortgage typically takes the priority position of the original mortgage through subrogation, provided the funds are used to pay off the original loan.
However, complications can arise if:
- The new loan exceeds the original mortgage amount;
- There are intervening liens between the original and new mortgages; or,
- Proper documentation isn’t filed.
Subordination Agreements
Lien priority can sometimes be voluntarily modified through subordination agreements. These legal documents allow a senior lienholder to agree to take a junior position behind another lien.
For example, if you want to refinance your first mortgage but have a home equity line of credit (HELOC) as a second lien, the HELOC lender might agree to subordinate their lien to the new first mortgage.
Challenging Lien Priority in Ohio
Sometimes lien priority disputes arise during foreclosure. These can involve:
- Questions about whether a lien was properly recorded
- Claims of mortgage fraud or predatory lending
- Disputes about the validity of a lien
- Arguments about the applicability of certain exceptions
Resolution of these disputes often requires legal action, including filing motions in foreclosure proceedings.
How Cavell Law Can Help
If you’re facing foreclosure or have questions about lien priority in Ohio, Cavell Law, LLC can provide the guidance you need.
With extensive experience in real estate litigation, our attorney can:
- Analyze your property’s lien situation
- Identify potential priority issues
- Develop strategies to protect your interests
- Represent you in lien priority disputes
- Negotiate with lienholders when appropriate
Lien priority plays a major role in what happens during a foreclosure, whether you’re a homeowner simply trying to protect your equity, a junior lienholder wondering if you’ll see any payout, or a buyer hoping for a clean title. The rules aren’t always straightforward, and small details can make a big difference related to who gets paid and when.
If you’re dealing with lien priority questions or other real estate issues in Ohio, it’s worth getting advice tailored to your situation. Our real estate attorney can help you make sense of your options and protect your financial interests. Contact us today for a consultation.
