Legal Definitions - junior lien

A junior lien is a legal claim or security interest on a piece of property that is subordinate to one or more other claims (known as "senior liens") on the same property. This means that if the property is sold or foreclosed upon, the holder of the junior lien will only be paid from the proceeds after all senior liens have been fully satisfied. If there isn't enough money to pay off all the senior liens, the junior lien holder might receive nothing.

Here are some examples to illustrate how a junior lien works:

• Residential Property Mortgages: Imagine a homeowner, Sarah, takes out a primary mortgage from Bank A to purchase her house. This first mortgage establishes a senior lien on the property. Years later, Sarah decides to take out a home equity loan from Bank B to finance a renovation project, using her house as collateral again. This home equity loan from Bank B is a junior lien. If Sarah were to default on her loans and the house was foreclosed and sold, the proceeds from the sale would first be used to pay off Bank A's primary mortgage in full. Only if there are funds remaining after Bank A is completely satisfied would Bank B receive any payment for its home equity loan.

• Business Asset Financing: Consider a manufacturing company, "Innovate Corp," that secures a large loan from "First National Bank" to buy new machinery. First National Bank places a senior lien on all of Innovate Corp's equipment and inventory. A year later, Innovate Corp needs additional working capital and obtains a smaller loan from "Community Credit Union," also using the same machinery and inventory as collateral. Community Credit Union agrees that First National Bank's lien takes precedence. Therefore, the loan from Community Credit Union is a junior lien. If Innovate Corp faces financial difficulties and its assets are liquidated, First National Bank would be paid first from the sale of the machinery and inventory. Community Credit Union would only recover its loan if there are sufficient funds left over after First National Bank's debt is fully repaid.