A note in first lien position is worth more than the same note in second position, because the first lien holder is paid first if the property is sold to cover the debt. Buyers accept a lower return on first liens, and more of them are willing to bid.
What lien position means
When you financed the sale, your mortgage or deed of trust gave you a lien: a claim against the property that secures what the payer owes you. If the payer stops paying, the lien is what allows the property to be sold to repay the debt. Our plain-English page on what a lien is has more.
A property can carry several liens, and lien position is the order in which they are paid out of a forced sale. The first is paid in full before the second receives anything. Position is generally set by the order in which the documents were recorded in the county records, though there are exceptions.
How to tell which you hold
If you sold a property you owned free and clear, carried the financing yourself and had the security document recorded at closing, you are probably in first position. If your buyer also took out a bank loan to complete the purchase, the bank’s loan is likely to be ahead of yours, which makes yours the second.
Why position changes the price
| First lien | Second lien | |
|---|---|---|
| Paid from a foreclosure sale | Ahead of other recorded loans | Only from what is left after the first is paid |
| If the first lien forecloses | Does not apply | The second lien can lose its claim on the property |
| Control when the payer defaults | Decides for itself whether to foreclose | May have to keep the first loan current to protect itself |
| Buyers willing to bid | The wider group of note buyers | A smaller group, at a higher yield |
Yield is the annual return a buyer needs on the price they pay. A second lien has more ways to lose money, so the buyer asks for a higher return and pays less for the note. Position also reaches into the other factors that decide what your note is worth: a buyer adds the first loan’s balance to yours when measuring equity, the property’s value above everything owed against it, and less equity pulls the price down again.
Claims that can come ahead of a first lien
Being first among recorded loans does not always mean being first in line. Unpaid property taxes are the familiar case of a claim that can rank ahead of a mortgage created earlier, and in some places other charges such as association dues or municipal liens can as well. The rules differ by state, so a local attorney or title company is the place to confirm how it works where the property is.
For that reason a buyer of a first lien checks that property taxes are paid, that the property is insured, and that nothing else has been recorded ahead of the note. If taxes have gone unpaid, expect the amount needed to bring them current to come off the offer.
How a buyer confirms your position
A buyer will not fund on your belief that you hold the first lien. They order a title search, a review of the county records for everything recorded against the property, which shows whether your security document was recorded, when, and what else sits on the title.
What turns up can often be fixed, though it takes time: a security document that was signed but never recorded, an old loan that was paid off but never formally released, a judgment against the payer. If you already know of something like this, say so when you send your note in for pricing, so the fix can start before a buyer is waiting on it.
If your note is a second lien
A second lien can still be sold, to fewer bidders and at a deeper discount, the discount being the gap between the balance owed and the price. What helps is a first loan that is small compared with the property’s value, a payer who is current on both loans, and a long clean record on yours. If no workable offer comes, keeping the note is the sensible choice. Buyers of second-lien notes are a market of their own, and how lien position affects note value for a second is worth reading before you judge an offer on one.
Papers to pull out first
Find the title policy from your original sale and your recorded mortgage or deed of trust, which will carry the county’s recording details. Add anything you know about other loans on the property and whether the taxes are current. Those are the first things a buyer asks about, and having them ready gives the title search a head start. If you cannot tell which position you hold, tell the buyer that and let the title search settle it.
Related questions
How do I know if my note is a first lien?
Look at when your mortgage or deed of trust was recorded and whether any other loan was recorded before it. A title search gives the definite answer, and a buyer will order one before funding.
Can a second-lien note be sold at all?
Yes, to a smaller group of buyers and at a deeper discount. The size of the first loan, the equity in the property and the payment record on both loans decide whether the offers are workable.
Does an unrecorded mortgage still count as a first lien?
Recording is what gives public notice of your lien, and an unrecorded document can lose its place to liens recorded later. If yours was never recorded, speak to an attorney or a title company about recording it before you sell.