First and foremost, real estate tax liens do not attach to people but to real property.Once a property becomes encumbered with a lien, it prevents the owner from selling the property until the lien has been released. Otherwise, an existing lien holder could enforce his/her claim through foreclosure, allowing him or her to take title to the real estate. This action effectively removes any claim to the property by junior lien holders.
To avoid losing a property to a pre-existing or senior lien holder, a growing number of lending institutions require a title search to be conducted before lending money for the purchase of real estate. A title search is an examination of public records, laws and court actions to make sure that the seller is the legal owner and to reveal all other claims or encumbrances on the property.
As an added precaution and condition of the loan, lenders will require borrowers to take out a title insurance policy. Title insurance is a contract under which the policyholder is protected from losses arising from defects in the title. A title company determines whether the title is insurable, after a review of the public records. If the title search proves little to no risk is present, a policy is issued. Unlike other insurance policies that insure against future loses, title insurance protects the insured against an event that occurred before the policy was issued.
In addition, many lenders require that borrowers provide a reserve fund to meet future real estate taxes and property insurance premiums. This fund is often called a trust or escrow account. When the mortgage or deed of trust loan is made, the borrower starts the reserve by depositing funds to cover the amount of unpaid real estate taxes.
If a new insurance policy has just been purchased, the insurance premium reserve will be started with the deposit of one twelfth of the insurance premium liability. The borrower’s monthly loan payments will include principal, interest, tax and insurance reserves, along with other costs, such as flood insurance or homeowner’s association dues.
When a lien is properly established, it becomes an encumbrance that sticks to the property, like a leach, and will not be removed or reinstated until all claims are satisfied.