Foreclosure Classroom – Priority Link – Why is it important for me to know?

Priority binding can be best explained with an example. In simple terms, when you buy a home through financing, the lender puts a lien on the property. It is called a secured loan, because the house is the collateral for the loan. If you, as a homeowner, default, the lender, using a security instrument (mortgage), repossesses the home. There can be multiple links in a property. Here is the example:

1. There is a first mortgage for $200,000, registered on 05/01/2005, at 1:00 p.m.
2. There is a second mortgage for $50,000, registered on 05/01/2005, at 2 PM.
3. There is a judgment for $2,000, registered on 05/05/2008
4. $3,000 IRS tax lien, filed 09/09/2008
5. $4,000 property tax lien, filed 04/15/2009

The general rule is: first in time, first in place. The first link is superior to all other links. The second link is smaller than the first, but larger than the rest.

Box #1. If the first link executes, all child links are removed. Except one. If there is any leftover, the lien holder of the next position is paid.

Box #2. If the second link is in foreclosure, they have to take over the first link. This means that the holder of the second link is responsible for paying the holder of the first link. All the others are annihilated. Except one.

Now let’s look at the special links: Property Tax Links and IRS Links. If property taxes are not paid, they are paid first. Keep in mind that property taxes take precedence over everything. It doesn’t matter when the link was recorded. This is why in a property tax foreclosure all liens are removed. All of them! Except one.

Here we are talking about the IRS link. This is the big exception. The IRS link is never deleted like the rest. If there is still equity in the house, the IRS has the right of redemption. They have 120 days to redeem the property and satisfy their bond. The IRS rarely does this, but it can happen.

Bondholders can still chase their unpaid debt. It’s called concept deficiency. They may collect your debt as an unsecured loan depending on state law. Do you think bondholders have a good chance of collecting their debt under a deficiency judgment (its status is as low as a credit card loan)? You’re right. Of course not. That’s why they rarely do.