What is an Encumbrance? How it Works and FAQs

Last updated 03/15/2024 by

Summary:

An encumbrance is any legal claim made on a property by someone who is not the owner. These claims can limit what’s done on the property. Encumbrances, such as liens, allow the property to be used as collateral for an obligation, such as mortgage payments. If the obligation is unmet, legal action can be taken against the borrower. Nearly every piece of property has an encumbrance.

Shopping for your dream home is exciting, but it’s important to keep more than your must-have list in mind. Almost every form of property has an encumbrance. Because of this, it’s safe to say you’ll come across an encumbrance at some point in your home buying process (if you haven’t already). That sounds intimidating, but you’re more familiar with encumbrances than you realize.

One of the most common kinds of encumbrances is a mortgage, but there are others you may not know about. This article outlines different types of encumbrances and helps you understand each one. By the end, encumbrances won’t be unfamiliar or intimidating, and you’ll have many questions answered.

What is an encumbrance?

An encumbrance is any legal claim on a property, not the owner. These claims usually limit how the property owner can use their real estate. Unfortunately, it’s difficult to find a home with a clear title nowadays as most properties have some kind of loan or encumbrance.

Some examples of encumbrances include mortgages, property taxes, easements, or restrictive covenants. Certain encumbrances use the property as collateral while others limit what can be done to a property. However, many make sure that a financial obligation is met.

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Types of encumbrances

Encumbrances affect properties differently depending on what the terms legally restrict and protect. Here are some of the most common examples:

Mortgage liens

Mortgage liens are security interests. The lender keeps an interest in the house’s title until it’s paid off. If a homeowner does not make their mortgage payments on time, lenders could foreclose and seize the home. Once the home is paid off, the mortgage lender removes the encumbrance.

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Voluntary liens

A voluntary lien is a type of security interest that the owner signs willingly, such as a mortgage. A lien gives a creditor the right to use the property as collateral and seize it for an unmet obligation. In a mortgage, lenders use the home as collateral. If the homeowner fails to make their monthly mortgage payments, the lender seizes the home.

Involuntary liens

Involuntary liens are placed on a property when an obligation was previously unmet. Though the property owner did not consent to this lien, whoever places the lien has the right to seize the property.

Tax liens are one of the most common types of involuntary liens. If the homeowner does not pay their property taxes, the government may place a federal tax lien on their home. If they continue to not pay taxes, the government can go forward with a foreclosure.

Legal encumbrances

Legal encumbrances regulate the use of real property. Buyers interested in the land must learn how the property’s legal encumbrances affect or limit the land’s uses before purchasing. Zoning laws or environmental regulations and restrictions are examples of legal encumbrances.

Mechanic’s Lien

Contractors, builders, and construction firms use mechanic’s liens when working on a structure. This lien guarantees that the business and workers will be paid first if liquidation occurs.

Easements

An easement allows a person to use or access someone’s property for a specific reason even though the property owner still retains rights to the land. Easements demonstrate how encumbrances can result in non-financial claims.

For example, an easement allows the city to build a pathway on someone’s property. The owner maintains the right to the land, but people have free use of the pathway. An easement also allows a gas line to go through someone’s land. Easements stay with the property and do not change with new ownership.

Restrictive covenants

A restrictive covenant is an agreement between the seller and buyer that limits what a buyer can do with his or her property. For example, restrictive covenants may mandate what color you can paint your house or how tall your trees can grow. These are common in homeowners associations (HOA) and deed-restricted communities.

Leases

A lease is a legal agreement to rent a specific space at a set price for a certain amount of time. Whoever issues the lease still has the title to the property and can therefore regain control of the space if the tenant does not pay rent.

Encumbrance vs. lien: what’s the difference?

Encumbrance and lien are related terms, and both work with personal property and real estate. However, they aren’t the same thing. Here are the key differences between an encumbrance and a lien:

It’s also important to remember that a lien is always an encumbrance, but an encumbrance is not always a lien. A lien represents a financial responsibility, where a borrower must repay a lender to keep possession of a property. An encumbrance can represent a series of legal restrictions that may lower your property value.

How do I learn if a property has an encumbrance?

One thing you can do is conduct a title search and get title insurance. A title search investigates public records to see if any claims exist. The homeowner can get title insurance to protect against certain claims.

From a buyer’s perspective, learning about an encumbrance is vital in the home buying process since any encumbrance transfers with the property’s ownership and may limit how you can use your real estate. Before signing any legally-binding paperwork, know what to expect by researching your potential property.

Is it smart to ignore an encumbered property?

Almost every property has an encumbrance, so to some extent it’s unavoidable. However, some encumbrances are more serious than others. A real estate agent or a real estate attorney can give you specific advice on encumbrances. They can help you decide if purchasing a property with an encumbrance is worth it.

What is the purpose of encumbrance accounting?

The main reason a business would use encumbrance accounting is to ensure they stay within their budget and do not overspend. By setting aside funds for a particular project, the company prepares for any potential liabilities and ensures the funds are not spent for another purpose.

How do you get rid of encumbrances?

Replotted property lines or a paid off mortgage can rid a property of an encumbrance.

Key Takeaways

An encumbrance is a legal claim on a piece of property and limits how the property is used.
Mortgages, liens, and zoning laws are all encumbrances.
It’s rare to find an unencumbered property, but it’s important to learn what specific encumbrance is on the home.
To find out more about your property’s encumbrance, talk to your real estate agent or a real estate attorney.

Find your best offer here

Encumbrances are unfortunately common, especially in the real estate market. However, it’s difficult to afford a home without a mortgage loan. If you’re looking for your perfect home, don’t stop now! With the right market research, you can afford your dream home and pay off your loan.

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Camilla Smoot

Camilla has a background in journalism and business communications. She specializes in writing complex information in understandable ways. She has written on a variety of topics including money, science, personal finance, politics, and more. Her work has been published in the HuffPost, KSL.com, Deseret News, and more.

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