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Lien vs. Encumbrance: Differences And Examples

Last updated 03/15/2024 by

Jamela Adam

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A lien is a financial claim on a piece of property, while an encumbrance is a general legal claim that may restrict the homeowner’s ability to use or sell the property. Liens and encumbrances can be placed on a property for a variety of reasons, including unpaid property taxes, outstanding HOA dues, or missing mortgage payments.
A lien is a monetary claim on a piece of real or personal property. It gives the holder of the lien the right to take possession of the property if the current owner fails to pay off debt or fulfill an obligation. An encumbrance, on the other hand, is any claim that limits or burdens the owner’s use or enjoyment of their property.
Understanding what liens and encumbrances mean and how they work is essential for anyone buying or selling property. In this article, we’ll explore the definitions of these two concepts and how they may affect you as a property owner.

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What is a lien?

A lien is essentially a monetary claim levied against property that allows the holder to obtain payment from the debtor. To put it in simple terms, a lien is a creditor’s claim on a debtor’s property.
A lien can be placed on the property by a variety of creditors. These include federal tax liens from the Internal Revenue Service (IRS) and those who have contributed to the value of your home, such as contractors and suppliers. When you have a lien placed on your property, it can be quite difficult to sell without first paying off the lien. For example, you may have to repay all unpaid property taxes to remove a tax lien.
Lienholders also have the right to seize the property and sell it to satisfy the outstanding debt that you owe them. A common scenario is the foreclosure of a home due to mortgage default.

What are the different types of liens?

It’s also important to know that there are two types of liens: voluntary and involuntary.
  • Voluntary liens. These types of liens are placed on a property when the owner agrees to use the property as security for repayment of debt. A common example is a mortgage loan.
  • Involuntary liens. An involuntary lien is placed on a property by creditors for unpaid debt obligations and are carried out without the consent of the owner.

How can I remove a lien?

There are a few ways to remove a lien from your property. The most straightforward way is to pay off the debt in full. However, the details on how to remove a lien will vary depending on the type of lien. For example, with a tax lien, you can file a release of lien form to show that you have in fact satisfied all outstanding debt (or you’re exempt for some other reason).
You can also remove a lien by negotiating with the creditor and coming to an agreement on a payment plan or settlement amount.

Pro Tip

Want to know whether a house has any liens on it? The simplest way to do this is with an online title search, checking the address with the county recorder, clerk, or county assessor’s office.
We also recommend getting title insurance, which will protect you from being responsible for a previous owner’s lien or encumbrance.

What is an encumbrance?

An encumbrance is a broad term that refers to any type of legal claim against a property that impacts its transferability or restricts its use. In other words, such claims do not allow the owner of the property to have full control over his or her property.
Encumbrances don’t necessarily need to be monetary or financial claims—they can also include property use restrictions.

Types of encumbrances

To help you get a better understanding of what encumbrances are, here are several different types of real estate encumbrances that you might come across.
  • Mortgage lien. A mortgage lien is created when a lender loans money to a borrower in exchange for the property being used as collateral. If the borrower fails to repay the loan, the lender has the right to take possession of the property. However, if you’re able to pay off the mortgage, the lender will release the mortgage lien placed on your home.
  • Easement. An easement is a type of encumbrance on real estate property that grants someone other than the owner the legal right to use or access the property. An example is a utility easement that grants public utility companies the right to access and use specific areas of private property for construction and maintenance purposes.
  • Encroachment. An encroachment is an unauthorized intrusion onto another person’s property. For example, if you build a fence that crosses onto your neighbor’s property lines without their permission, that would be an encroachment. In some cases, encroachments may not be a big deal and the property owner may not mind. However, in other cases, encroachments can be a serious issue and the property owner may want to take legal action to have the encroachment removed.
  • Lease. A lease is a contract between a tenant and landlord that gives the tenant the right to use and occupy a property for a specific period of time in exchange for rent. It’s considered an encumbrance because the property ownership or title isn’t passed from the landlord to the tenant during the lease period.
  • Restrictive covenant. A restrictive covenant is a legal contract between two or more parties that restricts the use of a particular piece of land. The purpose of a restrictive covenant is to maintain and preserve the value of the adjoining land, and to protect the interests of the party who holds the covenant.
  • Lien. As mentioned, a lien is a security interest in property to secure the payment of a debt. If the debt is not paid off, the lienholder can seize your property to pay off the amount you owe.

What does encumbrance mean in finance?

The concept of encumbrance is not only used in the real estate world. It’s often used in finance as well. In this case, an encumbrance is a restriction placed on the use of funds to ensure that there is a sufficient budget reserved for a specific future liability.

What are the differences between liens and encumbrances?

Though many may use these two terms interchangeably, there is actually a slight difference between a lien and an encumbrance.
A lien is a monetary or financial claim against the property of another person as security for a debt. An encumbrance, however, is a broader term referring to any type of claim against a property. In short, a lien is a type of encumbrance, but not all encumbrances are liens.
Keep in mind that though liens and encumbrances are mostly associated with real estate, they can also be applied to personal property such as cars, and even boats.

What does it mean when a property is free from liens and encumbrances?

If a property is free from liens and encumbrances, it means that the owner has full title to the property and no one else can claim any rights to it. This usually happens when the property has been paid off in full, or when all mortgages and other debts against it have been satisfied. A property with no liens or encumbrances is also known as a “clear title.”

Key Takeaways

  • A lien is a monetary claim on a property used to secure payment of outstanding debt. There are two types of liens: voluntary and involuntary.
  • An encumbrance is any sort of claim against a property.
  • A lien is a type of encumbrance, but not all encumbrances are liens.
  • Encumbrances can include mortgages, easements, encroachments, leases, restrictive covenants, and liens.

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