Title Tip – Priority
For any mortgage filed on real property, it is important to establish that the loan is in “first lien position”. Lenders demand and expect this. Title Insurance insures this for a new loan – unless there is an existing mortgage that is expected to remain in place. (If this is the case, then the new mortgage will be in 2nd lien position.)
For a construction project with a construction loan, there is more to making sure that first lien position (or priority) is established. It is important to have an understanding of this.
Minnesota Statute 514.05 Subdivision 1 States: All liens, ……, shall attach and take effect from the time the first item of material or labor is furnished upon the premises for the beginning of the improvement, and shall be preferred to any mortgage or other encumbrance not then of record, ……
From a practical standpoint – this means that ANY visible improvement upon the land that is done BEFORE the mortgage is recorded, allows any other work done on the property (even if it’s done much later) to be a higher priority than the construction loan that is being taken out. For example: assume that some building materials are dropped on the property BEFORE the mortgage is recorded at the county. The result would be that ANY work done on the project will be ahead of the mortgage in priority. Even if some work is done 10 months after the mortgage is recorded, the MN statute allows this work to be ahead of the mortgage in priority.
So it is very important for the safety of the loan and the project – that proper priority be established and documentation be taken that can prove this. We will discuss this in more detail in the next title tip.
Disclaimer – this information is NOT legal or financial advice, and should not be used as a substitute for the same. It is offered for informational purposes only. Many different factors can influence the proper course of action for a particular situation. Please seek the advice of a qualified professional for guidance with your specific transaction.