The Basics: First In Time, First In Right
In American property law, liens are generally prioritized by the date they were recorded — a principle known as "first in time, first in right." The lien that was recorded first typically has the highest priority, meaning it gets paid first when the property is sold. The second lien gets paid second, and so on down the chain.
This ranking is critical to understanding who is entitled to surplus funds. If a property is sold at a tax sale or foreclosure and generates $100,000 in surplus, the question is not simply "who owned the property" — it is also "which lienholders have a claim to that money, and in what order?"
Common Types of Liens and Their Typical Priority
Different types of liens have different priority positions. Here is the general hierarchy recognized in most states:
- Property tax liens: In nearly all states, property tax liens have super-priority status — they rank above all other liens, including first mortgages. This is why tax sales can wipe out even a senior mortgage.
- First mortgage liens: The primary mortgage used to purchase the property. If the property is sold in a foreclosure, the first mortgage is typically paid before any junior liens.
- Second mortgages and home equity lines of credit: Junior to the first mortgage. These lenders are only paid if there are sufficient proceeds after the first mortgage is satisfied.
- Mechanic's liens: Filed by contractors or suppliers for unpaid work on the property. Priority varies by state — some states give mechanic's liens priority over mortgages, while others do not.
- HOA and condo association liens: In many states, these liens have limited super-priority for a portion of unpaid assessments, followed by regular priority for the remainder.
- Judgment liens: Filed after a creditor obtains a court judgment. Generally junior to mortgages and tax liens.
- IRS tax liens: Federal tax liens follow special rules and may take priority over certain other liens depending on when they were filed.
How Lien Priority Affects Surplus Fund Claims
When a forced sale generates surplus funds, the surplus is distributed according to lien priority. The most senior lienholder is paid first. If surplus remains, the next senior lienholder is paid. This continues until the surplus is exhausted or all valid liens have been satisfied. Any remaining surplus is distributed to the former property owner.
If you are a former owner making a claim, you are not in the lien priority chain — you are the residual claimant. You are entitled to whatever is left after all valid liens with an interest in the surplus have been paid. If the surplus is large enough to cover all liens, the remainder goes to you. If it is not, you may receive nothing.
The Tax Sale Priority Distinction
Tax sales operate under a different lien-priority framework than mortgage foreclosures. Because property tax liens have super-priority, a tax sale can wipe out all other liens — including mortgages — regardless of when they were recorded. However, the surplus funds from a tax sale are generally distributed in order of the pre-sale lien priority. This means a first mortgage lender whose lien was extinguished by a tax sale may have a claim to the surplus before the former owner.
Competing Claims and Interpleader
When multiple parties assert competing claims to the same surplus — for example, a former owner and a junior lienholder, or multiple heirs — the lien priority rules determine who gets paid and in what order. If the priority order is clear, the paying agency may distribute accordingly. If it is unclear, the agency may file an interpleader action, depositing the funds with the court and asking the court to decide among the competing claimants.
What Claimants Should Know
- If you are a former owner, understand that your right to surplus is subject to the claims of any valid lienholders.
- If you are a lienholder, understand that your priority depends on the type of lien, when it was recorded, and the type of sale that occurred.
- Lien priority can be complex, particularly when multiple states, types of liens, and timing questions are involved. When in doubt, consult a real estate attorney.