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A mortgage lien may sound scary, but any homeowner with a mortgage has one. It’s simply the legal claim that your mortgage issuer has on your home until you have paid off your mortgage.

Then there are involuntary liens, which can be frightful. Think tax liens, mechanic’s liens, creditor liens, and child support liens.

What Is a Mortgage Lien?

Mortgage liens are part of the agreement people make when they obtain a mortgage loan. Not all homebuyers can purchase a property in cash, so lenders give buyers cash upfront and let them pay off the loan in installments, with the mortgage secured by the property, or collateral.

If a buyer stops paying the mortgage, the lender can take the property. If making monthly mortgage payments becomes a challenge, homeowners would be smart to contact their loan servicer or lender immediately and look into mortgage forbearance.

Mortgage liens complicate a short sale.

They will show up on a title report and bar the way to a clear title.

Recommended: Tips When Shopping for a Mortgage

Types of Liens

Generally, there are two lien types: voluntary and involuntary.

Voluntary

Homebuyers agree to a voluntary, or consensual, lien when they sign a mortgage. If a homeowner defaults on the mortgage, the lender has the right to seize the property.

Voluntary liens include other loans:

•  Car loans

•  Home equity loans

•  Reverse mortgages

Voluntary liens aren’t considered a negative mark on a person’s finances. It’s only when a borrower stops making payments that the lien could be an issue.

Involuntary

On the other side of the coin is the involuntary, or nonconsensual, lien. This lien is placed on the property without the homeowner’s consent.

An involuntary lien could occur if homeowners are behind on taxes or homeowners association payments. They can lose their property if they don’t pay back the debt.

Property Liens to Avoid

Homeowners will want to avoid an involuntary lien, which may come from a state or local agency, the federal government, or even a contractor.

Any of the following liens can prohibit a homeowner from selling or refinancing property.

Judgment Liens

A judgment lien is an involuntary lien on both real and personal property and future assets that results from a court ruling involving child support, an auto accident, or a creditor.

If you’re in this unfortunate position, you’ll need to pay up, negotiate a partial payoff, or get the lien removed before you can sell the property.

Filing for bankruptcy could be a last resort.

Tax Liens

A tax lien is an involuntary lien filed for failure to pay property taxes or federal income taxes. Liens for unpaid real estate taxes usually attach only to the property on which the taxes were owed.

An IRS lien, though, attaches to all of your assets (real property, securities, and vehicles) and to assets acquired during the duration of the lien. If the taxpayer doesn’t pay off or resolve the lien, the government may seize the property and sell it to settle the balance.

HOA Liens

If a property owner in a homeowners association community is delinquent on dues or fees, the HOA can impose an HOA lien on the property. The lien may cover debts owed and late fees or interest.

In many cases, the HOA will report the lien to the county. With a lien attached to the property title, selling the home may not be possible. In some cases, the HOA can foreclose on a property if the lien has not been resolved, sell the home, and use the proceeds to satisfy the debt.

Mechanic’s Liens

If a homeowner refuses to pay a contractor for work or materials, the contractor can enforce a lien. Mechanic’s liens apply to everything from mechanics and builders to suppliers and subcontractors.

When a mechanic or other specialist files a lien on a property, it shows up on the title, making it hard to sell the property without resolving it.

Lien Priority

Lien priority refers to the order in which liens are addressed in the case of multiple lien types. Generally, lien priority follows chronological order, meaning the first lienholder has priority.

Lien priority primarily comes into play when a property is foreclosed or sold for cash. The priority dictates which parties get paid first from the home’s sale.

Say a homeowner has a mortgage lien on a property, and then a tax lien is filed. If the owner defaults on their home loan and the property goes into foreclosure, the mortgagee has priority as it was first to file.

Lien priority also explains why lenders may deny homeowners a refinance or home equity line of credit if they have multiple liens to their name. If the homeowner were to default on everything, a lender might be further down the repayment food chain, making the loan riskier.

How to Find Liens

Homeowners or interested homebuyers can find out if a property has a lien on it by using an online search. Liens are a public record, so interested parties can research any address.

For a DIY approach:

•  Search by address on the local county’s assessor or clerk’s site.

•  Use an online tool like PropertyShark.

Title companies can also search for a lien on a property for a fee.

If sellers have a lien on a property they’re selling, they’ll need to bring cash to the closing to cover the difference. If the seller doesn’t have enough money, the homebuyer is asked to cover the cost, or they can walk away from the deal.

How Can Liens Affect Your Mortgage?

An involuntary lien can affect homeowners’ ability to buy a new home, sell theirs, or refinance a mortgage. Lenders may deem the homeowner too big a risk for a refinance if they have multiple liens already.

Or, when homeowners go to sell their home, they’ll need to be able to satisfy the voluntary mortgage lien or liens at closing with the proceeds from the sale. If they sell the house for less than they purchased it for or have other liens that take priority, it may be hard to find a buyer willing to pay the difference.

Liens can also lead to foreclosure, which can impede a person’s chances of getting a mortgage for at least three to seven years.

How to Remove a Lien on a Property

There are several ways to remove a lien from a property, including:

•  Pay off the debt. The most straightforward approach is to pay an involuntary lien, or pay off your mortgage, which removes the voluntary lien.

•  Ask for the lien to be removed. In some cases, borrowers pay off their debt and still have a lien on their property. In that case, they should reach out to the creditor to formally be released from the lien and ask for a release-of-lien form for documentation.

•  Run out the statute of limitations. This approach varies by state, but in some cases, homeowners can wait up to a decade and the statute of limitations on the lien will expire. However, this doesn’t excuse the homeowner from their debt. It simply removes the lien from the home, making it easier to sell and settle the debt.

•  Negotiate the terms of the lien. If borrowers are willing to negotiate with their creditors, they may be able to lift the lien without paying the debt in full.

•  Go to court. If a homeowner thinks a lien was incorrectly placed on their property, they can file a court motion to have it removed.

Before taking any approach, you might consider reaching out to a legal professional or financial advisor to plan the next steps.

Recommended: Home Loan Help Center

The Takeaway

Liens can be voluntary and involuntary. Many homeowners don’t realize that the terms of their mortgage include a voluntary lien, and as long as you make your mortgage payments this is nothing to be concerned about. It’s involuntary liens that homeowners would be smart to avoid.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

FAQ

What type of lien is a mortgage?

A mortgage lien is a voluntary lien because a homeowner agrees to its terms before signing the loan.

Will having a lien prevent me from getting a new loan?

Some liens can keep people from getting new loans. Lenders are unlikely to loan applicants money if they have multiple liens.

Is it bad to have a lien on my property?

A mortgage lien is voluntary and not considered bad for a borrower. But an involuntary lien prohibits owners from having full rights to their property, which can affect their ability to sell the home.

How can I avoid involuntary liens?

Homeowners can avoid involuntary liens by staying up to date on payments, including property taxes, federal income taxes, HOA fees, and contractor bills.

Can an involuntary lien be removed?

Yes, an involuntary lien can be removed in several ways, including paying off the debt, filing bankruptcy, negotiating the debt owed, and challenging the lien in court.

Photo credit: iStock/adaask
SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

This article is not intended to be legal advice. Please consult an attorney for advice.

SOHL-Q324-041

Guaranteed by the Federal Housing Administration, FHA 203(b) and FHA 203(k) loans are both types of mortgages with more flexible credit and income requirements than conventional mortgages. While the FHA 203(b) loan is the flagship loan program for homebuyers, 203(k) loans can help you buy a fixer-upper in need of significant repair. A 203(k) loan can roll repair costs into the mortgage amount. Learn more about FHA 203(b) vs 203(k) and their key similarities and differences.

Note: SoFi does not offer FHA 203(b) or FHA 203(k) loans at this time.

FHA 203(b) Loans

Often simply referred to as FHA loans, FHA 203(b) loans are mortgages for homebuyers. Current homeowners can also use FHA 203(b) loans to refinance their home loan.

What Is an FHA 203(b) Loan?

FHA 203(b) loans are insured by the Federal Housing Administration and may be more accessible to borrowers with less-than-stellar credit or a high debt-to-income ratio than conventional mortgages.

There’s lots to learn about the basics of FHA loans, but here are some highlights: You can use one to purchase a single-family home or a property with up to four units. (FHA borrowers must make the property their primary residence for at least one year.) Whatever type of property you choose, it must pass the FHA’s appraisal and inspection standards. Basically, the home must be in good condition and not require major repairs or renovations.

FHA loans come with both upfront and annual mortgage insurance premiums. The upfront cost is 1.75% of your loan amount and is collected at closing. The annual costs vary depending on your loan-to-value ratio and other factors. You’ll pay MIP (mortgage insurance) for 11 years if your down payment is 10% or higher. If your down payment falls below 10%, you’ll pay MIP for the life of the loan.

Eligibility Requirements

While FHA 203(b) loans are insured by the Federal Housing Administration, you’ll have to apply for one through a participating lender, such as a bank or credit union. Here are the eligibility requirements borrowers must meet:

•   Credit score of 500 or higher: You can qualify with a credit score as low as 500 if your down payment is at least 10%. If your down payment is lower, you generally need a credit score of 580 or higher.

•   Down payment of at least 3.5%: You must provide a minimum down payment for an FHA loan of 3.5%, but a down payment of 10% or higher can mean a lower credit score requirement and fewer years of MIP payments.

•   Debt-to-income (DTI) ratio no higher than 43%: Your DTI compares your monthly debt obligations with your income.

•   Loan size that falls within FHA limits: The limits vary by property size but currently fall between $524,225 and $1,209,750 for one-unit properties.

Property Requirements

You won’t need an inspection to obtain an FHA loan, but before a lender can issue you an FHA 203(b) loan, an official appraiser needs to check that the property meets FHA standards for safety, security, and soundness. The appraiser will check out the interior and exterior of the home and look for features such as:

•   Functional home systems and appliances

•   A well-ventilated basement or crawl space

•   Working plumbing with hot and cold water

•   A roof with at least two years of life left

•   A durable foundation with sufficient drainage

The home must meet the FHA’s minimum property standards in order to be eligible for FHA loan financing. It should also adhere to FHA flipping rules, designed to prevent borrowers and lenders from falling prey to fraud.

Found a home that needs significant work? Then you might be better off with an FHA 203(k) loan.

FHA 203(k) Loans

The FHA 203(k) loan program is geared toward fixer-uppers that need major repairs. Here are the details of FHA 203(k) loans, including how they work and their eligibility requirements.

What Is an FHA 203(k) Loan?

FHA 203(k) loans help homebuyers finance the purchase of a home and the costs of its repairs in a single mortgage. There are two types: the limited 203(k) loan and the standard 203(k) loan.

The limited 203(k) loan lets you finance up to $35,000 in your mortgage for repairs and upgrades. The standard 203(k) loan doesn’t specify a maximum limit, but it’s designed for major repairs that will cost at least $5,000.

The total property value and cost of repairs, however, must still fall within the FHA’s maximum mortgage limits. Some projects that a 203(k) loan could cover include:

•   Fix water damage

•   Perform electrical repairs

•   Repair or replace major appliances

•   Repair termite or pest damage

•   Complete unfinished renovation projects

Eligibility Requirements

The eligibility requirements for an FHA 203(k) loan are similar to those of an FHA 203(b) loan. You’ll need a credit score of at least 500 or 580, depending on your down payment size, and a DTI ratio no higher than 43%. The minimum down payment requirement is 3.5% and the loan comes with upfront and annual MIP costs.

Property Requirements

If you apply for a 203(k) loan, an official appraiser will check out the property and gather details on its interior and exterior structure. The home must be in need of at least $5,000 in repairs to qualify for the standard 203(k) loan. You generally need to complete the work within six months.

Recommended: Home Loan Help Center

Comparing FHA 203(b) and FHA 203(k) Loans

In a survey of FHA 203(b) vs. 203(k) loans you’ll see lots of similarities. Both are insured by the FHA and have less strict credit and DTI requirements than conventional mortgages. Plus, they require only a 3.5% down payment, making them accessible to homebuyers with limited funds upfront.

However, 203(b) loans are meant to help you buy a turnkey house that is more or less move-in ready. The home must meet the FHA’s minimum property standards and not have any major structural issues or damage.

A 203(k) loan, on the other hand, can be used to finance a fixer-upper that needs work. This type of loan lets you roll the repair costs into the mortgage so you don’t have to pay for them out of pocket. However, you’ll need to finish the work within a certain time frame.

Deciding Between FHA 203(b) and FHA 203(k)

A 203(b) loan is the more common choice among FHA loans. It could be a good fit if you want to buy a home or invest in a property that’s in relatively good condition. An FHA 203(k) loan, meanwhile, could make sense if you’re looking to buy a home in need of repair. Keep in mind, though, that you’ll end up paying interest on any repair costs that you roll into the mortgage. Plus, FHA 203(k) loans can have slightly higher interest rates than their 203(b) counterparts.

Recommended: Tips to Qualify for a Mortgage

Applying for FHA 203(b) and FHA 203(k) Loans

If you’ve studied an FHA loan guide and think this type of loan is for you, you can apply for an FHA 203(b) or 203(k) loan with a lender that issues these types of loans. It’s a good idea to explore your options for both FHA loans and conventional mortgages to determine which type of financing would be most affordable for you.

Lender Requirements

The lender has to abide by Federal Housing Administration criteria, but they might set even higher requirements. Some companies, for example, will only consider potential FHA borrowers with a credit score of at least 580. It could be worth shopping around to find a lender with requirements that you can meet for credit score, DTI ratio, and other financial factors.

Required Documentation

As with any type of mortgage, you’ll need to provide a bunch of documentation to get an FHA loan. This may include:

•   Income tax returns

•   W-2s or 1099s

•   Pay stubs

•   Bank account statements

•   Investment account statements

•   Identification

The lender will also run a credit check to review your credit.

Application Process

You’ll need to fill out an application for your FHA loan with your personal and financial details, as well as information on the property and your down payment amount. After submitting the application, you’ll likely encounter the following steps:

•   Schedule an appraisal: An FHA-approved appraiser will evaluate the property and determine its market value.

•   Wait for loan underwriting: The lender will verify your information and process your loan. You may be asked to submit additional information or documentation during this time.

•   Close on your loan: Once everything goes through, you can close on your loan, provide your down payment, and move forward with purchasing your new home.

If you’re applying for an FHA 203k loan, you may need to work with a consultant, who will estimate repair costs for the home. Working with a licensed contractor who understands the 403k loan requirements may also be part of the process. Once the work is finished, the consultant will evaluate the project to ensure it meets FHA standards.

The Takeaway

FHA loans can be a useful financing option for homebuyers who may not be able to meet the credit and DTI ratio requirements for a conventional mortgage, though they do come with mortgage insurance premiums that can increase the cost of borrowing. A 203(b) loan can help you purchase a move-in ready home, while a 203(k) loan can be used to finance renovations and repairs.

FAQ

Can I use an FHA 203(k) loan for a new construction home?

FHA 203(k) loans can only be used for properties that are at least one year old.

Are there limits on the renovation costs for an FHA 203(k) loan?

With a limited FHA 203(k) loan, homebuyers can finance up to $35,000 in their home loan to repair their home. A standard 203(k) loan, on the other hand, can finance major rehabilitation and repairs as long as the costs are at least $5,000. The total cost of the loan and renovation cannot exceed the FHA Maximum Loan Limit which in 2025 is $524,225 for a single-family home in most places.

Are interest rates different for 203(b) and 203(k) loans?

FHA 203(k) loans typically have interest rates that are about 0.75% to 1.00% higher than standard FHA loans, according to The Mortgage Reports.

Photo credit: iStock/andresr

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SOHL-Q324-020

What Is the Payback Period?

The payback period is the amount of time it will take to recoup the initial cost of an investment, or to reach its break-even point. Considering the ups and down of various market factors — e.g. the crypto winter or the impact of higher-than-usual interest rates — being able to gauge the payback period is one of the most important calculations for investors when planning investments and returns.

The payback period can help investors decide between different investments that may have a lot of similarities, as they’ll often want to choose the one that will pay back in the shortest amount of time. The longer money remains locked up in an investment without earning a return, the more time an investor must wait until they can access that cash again, and the more risk there is of losing the initial investment capital.

How to Calculate the Payback Period

The payback period is calculated by dividing the cost of the investment by the annual cash flow until the cumulative cash flow is positive, which is the payback year. Payback period is generally expressed in years.

Prior to calculating the payback period of a particular investment, one might consider what their maximum payback period would be to move forward with the investment. This will help give them some parameters to work with when making investment decisions. If the calculated payback period is less than the desired period, this may be a safer investment.

There are two easy basis payback period formulas:

Payback Period Formula (Averaging Method)

Payback Period = Initial Investment / Yearly Cash Flow

Using the averaging method, the initial amount of the investment is divided by annualized cash flows an investment is projected to generate. This works well if cash flows are predictable or expected to be consistent over time, but otherwise this method may not be very accurate.

Payback Formula (Subtraction Method)

Payback Period = the last year with negative cash flow + (Amount of cash flow at the end of that year / Cash flow during the year after that year)

Using the subtraction method, one starts by subtracting individual annual cash flows from the initial investment amount, and then does the division. This method works better if cash flows vary from year to year.

Other factors

Investors might also choose to add depreciation and taxes into the equation, to account for any lost value of an investment over time.

Benefits of Using the Payback Period

The payback period is simple to understand and calculate. It can provide individuals and companies with valuable insights into potential investments, and help them decide which option provides the best return on investment (ROI). It also helps with assessing the risk of different investments. Advantages include:

•  Easily understandable

•  Simple to calculate

•  Tool for risk assessment

•  Helps with comparing and choosing investment options

•  Provides insights for financial planning

•  Other calculations, such as net present value and internal rate of return, don’t

•  look at the amount of time it takes to recoup an investment

Downsides of Using the Payback Period

Although the payback period can be a useful calculation for individuals and companies considering and comparing investments, it has some downsides. The calculation only looks at the time period up until the initial investment will be recouped. It doesn’t consider the earnings the investment will bring in after that, which may either be higher or lower, and could determine whether it makes sense as a long-term investment.

If earnings will continue to increase, a longer payback period might be acceptable. If earnings might decrease after a certain number of years, the investment may not be a good idea even if it breaks even quickly. On the other hand, an investment with a short lifespan could need replacement shortly after its payback period, making it a potentially poor investment.

The payback period doesn’t take into consideration other ways an investment might bring value, such as partnerships or brand awareness. This can result in investors overlooking the long-term benefits of the investment since they’re too focused on short-term ROI.

The payback period equation also doesn’t take into account the effects an investment might have on the rest of the company’s operations. For instance, new equipment might require a significant amount of expensive power, or might not be able to run as often as it would need to in order to reach the payback goal.

Another limitation of the payback period is that it doesn’t take the time value of money (TVM) into account. The time value of money is the idea that cash will be worth more in the future than it is worth today, due to the amount of interest that it can generate. Not only does this apply to the initial capital put into an investment, but it’s also important because as an investment generates returns, that cash can then be reinvested into something else that earns interest or income. This is another reason that a shorter payback period makes for a more attractive investment.

When Would You Use The Payback Period?

The payback period can apply to personal investments such as solar panels or property maintenance, or investments in equipment or other assets that a company might consider acquiring. Often an investment that requires a large amount of capital upfront generates steady or increasing returns over time, although there is also some risk that the returns won’t turn out as hoped or predicted.

Calculating payback periods is especially important for startup companies with limited capital that want to be sure they can recoup their money without going out of business. Companies also use the payback period to select between different investment opportunities or to help them understand the risk-reward ratio of a given investment.

Knowing the payback period is helpful if there’s a risk of a project ending in the future. For example, if a company might lose a lease or a contract, the sooner they can recoup any investments they’re making into their business the less risk they have of losing that capital.

Any particular project or investment can have a short or long payback period. A short period means the investment breaks even or gets paid back in a relatively short amount of time by the cash flow generated by the investment, whereas a long period means the investment takes longer to recoup. How investors understand that period will depend on their time horizon.

The Takeaway

You can use the payback period in your own life when making large purchase decisions and consider their opportunity cost. Understanding the way that companies calculate their payback period is also helpful to determine their financial viability and whether it makes sense for you to invest in them as part of your portfolio.

Whether you’re new to investing or already have a portfolio started, there are many tools available to help you be successful. One great online investing tool is SoFi Invest® online brokerage platform. The investing platform lets you research and track your favorite stocks and ETFs. You can easily buy and sell with just a few clicks on your phone, and view your portfolio on one simple dashboard.

You can choose from either active or automated investing. With active investing, you can hand select each individual stock or ETF you wish to add to your portfolio. Using automated investing, you can choose from groups of pre-selected stocks. There are additional tools in the app to set personal financial goals and add all your banking and investment accounts so you can see all of your information in one place.

If you have any questions or need help getting started, SoFi has a team of professional financial advisors available to help you reach your personal financial goals.

You may also be interested in:

Rate of Return (RoR): Formula and Calculation Examples

NPV Formula: How to Calculate Net Present Value

Discounted Cash Flow (DCF) Explained

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