Understanding Mechanic’s Liens

When you are remodeling or building your home, a mechanic’s lien is a guarantee of payment to the laborers and firms that were involved in the construction. Like other liens, they act as security for the party with whom you’re doing business. It stays in place on your home until the project is finished and all of the necessary parties have been paid.

Mechanic’s liens are also known as:

• Construction lien
• Supplier’s lien
• Laborer’s lien

What Happens If I Don’t Pay?

Simply put, if you don’t pay what you owe, you could lose possession of your home until you pay for services rendered. To avoid a lien, there are several options you can consider:

• Create a joint checking account with the contractor to make sure money is going to all the right places and subcontractors get paid.
• Get a lien waver if your state allows it, which helps ensure that everyone has been paid before the contractor will get further payments from the owner

Paying the subcontractors yourself to avoid a lien isn’t recommended as you will look like their employer, which will make you responsible for their paychecks and deducting taxes from them. Not a responsibility you need to take on.

What if the Contractor Didn’t Pay the Subcontractor?

If the contractor remodeling your home doesn’t pay their subcontractor, you can still have a mechanic’s lien put on your home. Then you may end up paying twice what you originally paid the contractor when subcontractors seek payment for services rendered. But it’s not all doom and gloom.

In certain states, if you pay the contractor in full and they do not pay the subcontractors, they can be charged with felony theft. So make sure you have a reliable contractor you’ve researched carefully and has a good, honest reputation.

Make Sure the Mechanic’s Lien is Valid

If a mechanic’s lien is filed on your home, make sure it’s valid. Valid lien requirements include:

• The Preliminary Notice must be given to you within a specific time frame
• The lien states amount owed, services or products provided, the property owner, the employer, where the services were delivered, a signed Proof of Service Affidavit, the claimant’s address
• The subcontractor filed a timely lien foreclosure action

If none of these are present, then the lien isn’t valid. Check with your attorney to make sure the claim is valid and advice for what to do next.

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The above information is for educational purposes only. All information, loan programs and interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply. Always consult an accountant or tax advisor for full eligibility requirements on tax deduction.