Foreclosed home can still have liens

Q: I am in the process of buying a new home. It's a foreclosure. The lender foreclosed on the developer. In doing my due diligence on the purchase, I noticed that some contractors were not paid. Will these contractors be able to put liens on the house after I close?

A: The short answer is yes. Most contractors can put a lien on a home when they have been hired to perform work on a home and they are not paid.

In some states, contractors have a certain amount of time to put a lien on a home. Some states even require contractors to give the owner notice of the lien before the lien can be effective. Each state has its own contractor's liens statutes and they can be quite complex.

A lender's mortgage lien is of the highest importance and can trump all other liens. For example, if the builder took out a loan to put up the home and the lender recorded that mortgage against that property, that lender's lien may have priority over all other liens. If the lender forecloses on the home, the lender may have the ability to wipe out all other subordinate liens, including contractor liens.

There are some peculiar circumstances that can crop up and make life difficult for you, so buying an owner's title insurance policy and hiring a good settlement company are important.

If you suspect there could be liens against the property, you need to make sure that the title insurance company and settlement attorney or closing agent issue you a title insurance policy at closing that would protect you against any and all possible contractor and materialmen liens that could pop up.

If you have obtained that coverage on your title insurance policy and liens do pop up, you would need to file a claim against the title insurance company to have them defend the lien or pay off the contractor or materialmen.

If you can't get title insurance coverage, you'll have to investigate who performed work on the property and start asking those contractors whether they got paid or not. If you get enough information, you might decide that the risk of liens is relatively small and proceed with the purchase.

If not, you'll have to factor into the price you pay the amount you may have to shell out to contractors to remove any future liens that pop up.

Lastly, if liens have already been placed on the property, you can usually get copies of those liens from your local government. You should consult a real estate attorney for additional guidance.

Q: My sisters and I recently inherited our mother's house. The sister that is executor of the will also wants to buy the house. The house has to be taken out of Mom's name before it can be sold, and the bank wants to put it in my sister's name. That way she would refinance the house to pay us off.

She would like to take advantage of the $8,000 first-time home buyer tax credit, because she hasn't bought a house yet. But if she refinances instead of buying the home, she can't.