Laying asphalt on a construction project

When a bank holds a mortgage on property, contractors are often unsure about how to include them in the payment process. Should you serve the bank a notice? Should you send them a copy of a lien claim if you haven’t been paid? This quick guide will help you understand when and how to involve your client’s mortgage lender in the mechanics lien process.

Who actually owns the property – the borrower or the bank?

One of the most important things to understand is who actually owns the home you’re working on. In nearly all states, the notices and other documents required by mechanics lien laws must be sent to the property owner. But when a mortgage bank is involved, who owns the building? Let’s dive into that quickly before we move forward.

When you borrow money to buy a vehicle, the bank holds the title until you pay it off — they effectively own it. Similarly, there’s a common misconception that as long as a homeowner owes money to a mortgage lender, the bank owns the home.

The truth is that the borrower, or homeowner, actually owns the property. The bank simply has a security interest in the property, which protects the loan. The bank would have to foreclose on the property to actually own it.

States treat mortgages a bit differently whether they are lien theory or title theory states. In title theory states, the mortgage is held in trust until the borrower pays off the loan. In lien theory states, the mortgage becomes a lien on the property’s title. Either way, for the purposes of mechanics lien laws, the bank is generally not considered the property owner. The borrower is the owner.

Now that we know the homeowner owns the home, what are the requirements regarding notices? Generally, there are no requirements to send a preliminary notice, notice of intent to lien, or lien claim to a mortgage lender. However, that’s not to say that you shouldn’t.

Sending notices to mortgage lenders

While you’re not generally obligated to send notices to a mortgage lender (there are exceptions), it may have crossed your mind. Many of these notices protect your payments and help you recover your cash faster. It would make sense to send some to the lender, right?

Let’s take a look at the two most common notices, and whether you should send them to a mortgage lender or not.

Preliminary Notices

Preliminary notices are an incredibly powerful tool, and they can help secure and protect your payments. Many states require them to secure lien rights. They also provide a professional first impression that lets the property owner and others involved know that you’re on site.

Preliminary notices explain the work you’re doing and that you expect to get paid. They also tell the customer that you’re willing to file a lien if need be.

Should you send a preliminary notice to a mortgage lender?

In certain states, like California and Arizona, you might not have a choice. In some cases, those states require you to send a preliminary notice to the lender.

In other states, where there is no obligation to send a preliminary notice to the bank, the property owner (your ultimate client) might see it as bad form.

Generally speaking, the preliminary notice is really of no concern to the bank. Since you’re only protecting your payment against a potential payment issue at this point, you don’t really need to get the bank involved. Sending a preliminary notice at this point doesn’t give you any substantial benefit.

Notice of Intent to Lien

A notice of intent to lien (NOI) is like a final warning shot across the bow. It tells non-paying customers that you’re prepared to take action if they don’t pay. Only a few states require you to send a notice of intent to the owner before filing a lien, but they can be very effective nonetheless. 

Should you send a notice of intent to lien to a mortgage lender?

Considering that only a few states even require NOIs, it shouldn’t be a surprise that you’re not typically obligated to send one to the bank.

However, sending a notice of intent to the bank can draw attention to the non-payment issue at hand. The bank may then put pressure on the property owner to make good on the payment.

Everyone wants to avoid a mechanics lien, including the bank. A mortgage lender would prefer their properties to remain lien-free. Mortgages usually take priority over mechanics lien claims, but even when they do, lenders would rather avoid having to deal with a foreclosure if it can be avoided. 

In the event of a foreclosure, there’s a real chance that your mechanics lien will take precedence over the mortgage lien. That means the bank may walk away with less money. The bank obviously wants to avoid that chance.

There’s another reason for sending a notice of intent: If your customer is mismanaging bank funds, an NOI may tip them off.

Including the mortgage company in a mechanics lien claim

If you’re not getting paid on a project, filing a mechanics lien against a property is the best way to secure your payment. Each state has its own requirements about who needs to receive a copy of the lien claim. However, the lender is usually not one of them.

Should you send a copy of the lien claim to the mortgage lender?

Again, it’s typically not a requirement, but it might be one of the most helpful tactics you can use.

By placing a lien against a bank-owned property, you may find that the bank starts working for you. They need the title clear, and you need the money owed to you. They may help pressure the customer to settle the debt with you.

Protecting your payments with notices

It’s best to leave certain aspects of mechanics liens, like lien amounts, to the minimum requirements to avoid potentially fatal mistakes. But in this case, sending important documents and copies to all parties involved, required or not, can help you get paid faster.

Ultimately, the more involved parties that are aware of the lien, the better the chance you stand of getting paid. Sending a preliminary notice to a bank when not required is largely overkill and ill-advised.

However, sending a notice of intent to lien, and copying them on a subsequent lien claim, can be very effective at speeding up your payments.