How To Refinance With a Mechanic’s Lien

Having a mechanic’s lien on your home can be stressful. You won’t be able to sell while it’s attached to your title, and you could even be taken to court and ordered to pay the debt or have your property sold.

But can you refinance with a mechanic’s lien, and if so, can you pay off the debt with the proceeds from your new loan? Typically, yes, but it may take finding the right lender.

Highlights

• Refinancing is possible with a mechanic’s lien, but it may require finding a lender willing to work with such encumbrances.
• A cash-out refinance is often necessary to pay off the lien, though some rate-and-term refinance options may be available for smaller liens.
• Title encumbrances must be settled before or during the refinance process to clear the title and obtain new title insurance.
• Alternative lien removal options exist that may be simpler or less costly, including negotiation, lien release bonds, and court discharge.

Why Do I Have a Mechanic’s Lien on My House?

A mechanic’s lien is a legally binding claim that a general contractor, subcontractor, or supplier can file for funds they believe they are owed for services rendered or products provided to your property.

General contractors often file a mechanic’s lien when they and the homeowner dispute payment for work completed. However, liens can also be attached to the title by subcontractors or suppliers not paid by the primary contractor.

It’s possible for these other parties to file a mechanic’s lien, even if you’ve never dealt with them directly and paid your general contractor all of the funds that you agreed to.

Filing a mechanic’s lien does not necessarily mean the claimant is owed the money. But it does put an encumbrance on your home, meaning that you can’t sell the property without settling the debt or taking other action to remove the lien.

Situations That Could Result in a Mechanic’s Lien

Numerous parties involved in construction and renovation projects on your home can file mechanic’s liens. Some examples of situations where a mechanic’s lien could occur include:

• After completing the work, your general contractor demanded more money than you agreed to, and you refused to pay the extra.
• You were unsatisfied with your general contractor’s work and refused to pay the agreed-upon amount.
• Your general contractor subcontracted an aspect of the project – such as running electricity or installing drywall – to another company but failed to pay them.
• Your general contractor ordered supplies – such as roofing materials or truckloads of concrete – for your project but failed to pay the supplier.

Can You Refinance With a Mechanic’s Lien?

If you have a mechanic’s lien on your home and are wondering if you can refinance, you can. However, the process may be more complicated than a typical refi.

You can pay mechanic’s liens with the proceeds from your refinance, but not all lenders are willing to take on loans with these types of encumbrances. Instead, many mortgage companies prefer you settle or bond the lien off your property (which we discuss more below) before refinancing.

But when lenders allow it, you can get a mechanic’s lien discharge with a loan refinance. Your closing agent will put a portion of your refinance loan into escrow to settle the debt and remove the encumbrance.

Is a Cash-Out Refinance Required to Pay Off a Mechanic’s Lien?

Do you need a cash-out refinance to pay off a mechanic’s lien? In most cases, yes – but not always.

Conventional guidelines allow you to refinance subordinate liens with a rate-and-term refinance, but only those used to purchase the property. Paying off a mechanic’s lien does not fall within Fannie Mae’s acceptable uses for this type of refi.

However, rate-and-term guidelines allow homeowners to receive a limited amount of cash back at closing, the lesser of $2,000 or 2% of the amount refinanced.

If you have a mechanic’s lien on your title for less than that amount, you may be able to pay off your encumbrance without doing a cash-out refinance.

However, you most likely need a conventional cash-out to tap into enough funds to pay off the lien.

What About Government-Backed Loans?

Do any government-backed loan programs allow you to pay off a mechanic’s lien without a cash-out refinance?

According to the Department of Housing and Urban Development (HUD), FHA rate-and-term guidelines allow for the “unpaid principal balance of any junior liens over 12 months old as of the date of mortgage disbursement.” In other words, the mechanic’s lien must have been placed on the property at least one year ago.

The VA doesn’t offer a standard rate-and-term refinance, but as the VA states, their cash-out refinance guidelines allow loan proceeds to cover “any type of lien or liens against the secured property.”

Conversely, the USDA does not offer a cash-out option, and its non-streamlined rate-and-term refinance only allows financing for the principal and interest balance of the existing loan, customary closing costs, and the USDA upfront guarantee fee. So, you likely can’t wrap the lien into a new USDA loan.

Equity Requirements for a Cash-Out Refinance

Paying off your mechanic’s lien with a cash-out refinance requires you to have more equity in your home than a standard rate-and-term refi. 

Guidelines specify the maximum amount mortgage providers can lend, represented as a percentage of a property’s value. This percentage is called the loan-to-value (LTV) ratio and is essentially the inverse of your built-up equity.

Conventional rate-and-term refinances are available with as little as 3% equity, meaning lenders have a maximum LTV of 97%. With a cash-out refinance, however, that maximum LTV drops to 80%.

That means you need at least 20% equity left over after paying off your lien and cashing out any other funds. If you plan to wrap closing costs into your new mortgage, plan to leave yourself an extra few percent of equity for that added expense.

Consider this example:

	Cash-out refinance could work.	Cash-out refinance won’t work.
Home Value	$350,000	$350,000
Existing Mortgage Balance	$260,000	$260,000
Closing Costs*	$7,000	$7,000
Mechanic’s Lien	$10,000	$20,000
New Loan Balance Needed (LTV)	$277,000 (79% LTV)	$287,000 (82% LTV)
Max New Loan (80% LTV)	$280,000	$280,000

Note: While FHA cash-out refinances also require at least 20% remaining equity, VA cash-outs are available for up to 100% of a property’s appraised value.

Can I Pay Off a Mechanic’s Lien with a Streamline Refinance?

Unfortunately, program guidelines do not allow you to pay off a mechanic’s lien with a streamline refinance. This holds true for all three agencies offering this low-doc refi option: the FHA, VA, and USDA.

Here’s a look at each program’s guidelines regarding what debts you can settle using a streamline refinance.

FHA Streamline Refinance

You can use the FHA streamline refinance to cover the outstanding principal balance, associated late charges, escrow shortages, and interest and MIP payments of an existing FHA loan.

VA Streamline Refinance

The VA interest rate reduction refinance loan (IRRRL) cannot be used to pay off debts other than the existing VA loan and its refinancing costs. VA guidelines say that proceeds from the loan “may only be applied to paying off the existing VA loan and to the costs of obtaining or closing the IRRRL.”

USDA Streamlined or Streamlined-Assist Refinance

As with their rate-and-term refinance, USDA streamlined and streamlined-assist loans are limited to the principal and interest balance of the existing loan and closing costs, including the upfront guarantee fee.

Do I Need to Pay Off a Mechanic’s Lien to Refinance?

In many cases, you can refinance to pay off your mechanic’s lien, but are you obligated to do so in order to refinance?

The answer is yes. Encumbrances on your title – such as a mechanic’s lien – must be paid off or otherwise removed prior to or as part of the refinancing process. Since the lien represents a legal claim on the property, your title company can’t provide a new title insurance policy while the lien is in force.

Other Ways to Remove a Mechanic’s Lien

Refinancing and using your home’s equity can be a practical solution if you want to settle a mechanic’s lien but don’t have the funds available. However, other ways to remove a mechanic’s lien may be simpler or cheaper.

Negotiate With the Contractor or Supplier

It’s uncommon for a contractor or supplier to take action to enforce a mechanic’s lien, and it’s even rarer for the case to reach the foreclosure stage. The entire legal process can be costly and time-consuming for both homeowners and claimants.

Most commonly, an agreement is reached between the two parties, although that doesn’t always mean for the total demanded amount. In many cases, you may be able to negotiate a lower settlement, with the claimant willing to accept a smaller figure to avoid taking the matter through the courts.

Obtain a Lien Release Bond

A lien release bond, also known as a surety bond, allows you to remove a mechanic’s lien from your home but does not absolve you of the debt. Instead of being secured by your property, the lien becomes secured by the bond and the insurance company backing it.

Bonding off your mechanic’s lien is one of the fastest and easiest ways to clear your title so that you can sell your home or refinance your existing mortgage. However, you must still settle the lien through negotiation or a judge’s order.

Surety companies generally require you to offer cash collateral for the lien amount to protect themselves in the event of a valid claim. They may also charge a fee for writing and backing the bond.

File to Have the Lien Discharged

If you’re confident that the mechanic’s lien has no merit or was filed outside of the rules or deadlines allowed by state law, you can ask the court to discharge the encumbrance altogether.

Having the lien removed from your title would require you to prove that the debt has been settled as agreed upon, that the work or products provided were of poor quality or outside of the scope of the contract, or that the proper legal procedure for filing a lien was not followed.

In most cases, this is a long, drawn-out process, with the costs of a real estate attorney growing at every step. Settling the mechanic’s lien through other avenues is often preferable for most homeowners.

Refinancing With a Mechanic’s Lien

If you currently have a mechanic’s lien on your home, you may be able to refinance your mortgage and pay off the debt. But if you just want to refinance and are in the process of disputing the encumbrance, you might opt for a lien release bond instead.

To find your refinancing options with a mechanic’s lien, check out the current interest rates and apply with a reputable lender who can assess your unique borrowing needs.