An encumbrance is any legal thing that burdens or restricts usage or transfer of a property. A property free-and-clear of any encumbrances is rare.
An encumbrance can be a mortgage, a lien (voluntary or involuntary), an easement, or a restriction limiting the transfer of a title. An encumbrance can involve money, but not always.
Learn more about encumbrances and how they work.
What Is an Encumbrance?
An encumbrance is a legal claim on a property. A mortgage is an obvious encumbrance; if a homeowner doesn't keep up with mortgage payments, the lender has the right to foreclose on the property. Any lien, or claim, on a property is an encumbrance. Zoning laws and environmental restrictions are also examples of encumbrances.
How Encumbrances Work
The way in which encumbrances work varies depending on the type of encumbrance. Some encumbrances, like liens, complicate property transfers. Others, like zoning laws, have minimal impact when you buy or sell property.
Here are common types of encumbrances and how they work.
Deed of Trust or Mortgage
When a homebuyer finances the purchase of a home, that financial transaction typically consists of two documents: the promissory note, which is an obligation to pay, and the mortgage or deed of trust, which secures the note and is recorded. A mortgage is slightly different than a deed of trust, but both are an encumbrance.
When a mortgage or deed of trust has been paid off, the encumbrance is then removed from the property in the public records. A common document to remove an encumbrance is called a reconveyance deed, which gives a clear title to the property owner.
A voluntary lien is a document that an owner willingly signs, and it's generally recorded against the property in public records. It could be a lien in exchange for money changing hands, such as a second loan or a home equity line of credit, or even a refinance of existing secondary financing.
In some cases, such as a line of credit, there might be no exchange of money until the homeowner actually taps the line of credit and borrows money. When interest rates are low, homeowners might take out a line of credit as an emergency source of funds. Even if the account is closed without ever being used, the homeowners must still record a release of the lien.
Two fairly common types of involuntary liens are a lis pendens and a mechanic's lien. By involuntary, it means the homeowner did not necessarily agree that such a lien can be filed against the property. Lis pendens means that legal action is pending. For example, a seller agreed to sell to a buyer but the buyer, for whatever reason, could not close on time. So the seller canceled the contract unilaterally, without the buyer's consent.
To further complicate the matter, let's say the seller desired to sell to another buyer for more money and refused to extend the time to close for the existing buyer. To prevent the seller from transferring title to the new buyer, the existing buyer might file a court action against the seller and record a lis pendens. The lis pendens would prohibit the sale until the court action was resolved.
A mechanic's lien is generally filed by a contractor or sub-contractor for work or materials that remain unpaid. All involuntary liens must be paid off for a title company to issue a title policy without naming the encumbrances as exceptions to the title insurance.
Involuntary encumbrances remain with the property until released. Lenders and buyers require a clear title, so it's best to resolve involuntary encumbrances quickly.
An easement is when the property owner retains the right to the land, but another entity also has the right to the land for a specific reason. One common type of easement is an easement for maintenance of utilities. An easement could also be granted for access (right of way) to a parcel of land that is landlocked without a road.
Easements are an encumbrance because they prohibit certain actions and affect rights to the property. For example, you cannot build a swimming pool over a location reserved for a city sewer line. If you do, the city can dig up the swimming pool without your permission.
Easements are noted in your title insurance policy and often appear on the assessor's map.
- An encumbrance is any legal item that restricts usage or the transfer of property. Most properties have an encumbrance.
- Mortgages and deeds of trust are common encumbrances. The encumbrance is released when the mortgage is paid in full or the home is sold.
- Involuntary liens can complicate home sales. These liens should be addressed promptly.
- Easements will be listed in your title insurance policy.