Are judgments and tax liens required to be paid off at or prior to loan closing?

Are judgments and tax liens required to be paid off at or prior to loan closing?

• A. True
• B. False
• C. Only if specified by the lender
• D. Only for FHA loans

Answer: (A)

Judgments and tax liens must be resolved before or at the time of loan closing to protect the lender’s interest in the property. These liens can create a senior claim against the property, which means that if the borrower defaults, the lienholder could take priority over the lender in collecting what is owed. By requiring the payment of judgments and tax liens, lenders are ensuring that there are no encumbrances on the title that could jeopardize their position. This requirement is standard practice to safeguard the investment they are making by issuing a mortgage. If these debts are not addressed, they could reduce the lender's security interest in the property, complicating the foreclosure process if necessary. Options suggesting that payment is only required under specific circumstances, like lender specifications or loan type, do not reflect the general rule in mortgage lending that all outstanding legal claims must be dealt with prior to closing. Thus, resolving these issues is critical in the closing process.

Judgments and tax liens must be resolved before or at the time of loan closing to protect the lender’s interest in the property. These liens can create a senior claim against the property, which means that if the borrower defaults, the lienholder could take priority over the lender in collecting what is owed.

By requiring the payment of judgments and tax liens, lenders are ensuring that there are no encumbrances on the title that could jeopardize their position. This requirement is standard practice to safeguard the investment they are making by issuing a mortgage. If these debts are not addressed, they could reduce the lender's security interest in the property, complicating the foreclosure process if necessary.

Options suggesting that payment is only required under specific circumstances, like lender specifications or loan type, do not reflect the general rule in mortgage lending that all outstanding legal claims must be dealt with prior to closing. Thus, resolving these issues is critical in the closing process.