If an asset or property is unencumbered, that means it’s free from any other obligations. There are no liens or claims from creditors that can affect the value of the property and the owner’s right to sell it when it’s unencumbered.
Definition and Examples of Unencumbered
An unencumbered asset is free from underlying judgments, liens, or any other obligations. It is free and clear, and can easily be transferred to a new owner.
If a property is encumbered, that means another individual or organization has an underlying claim on the property. This encumbrance could take the form of liens, legal judgments, or unpaid taxes. So an unencumbered property is one that is free from any of these other underlying claims.
If you are buying a new home, your mortgage lender will have a title company run a title search on the property. It will do this to ensure the property is unencumbered and free to be purchased by you, the new owner.
For example, let’s say you want to buy a house. If there was an undiscovered tax lien on the home, it wouldn’t be free to purchase until the debt is settled with the federal, state, or local government. If the encumbrance goes undetected, you as the new owner would be responsible for the debt and at risk of losing the property.
Your mortgage lender should work with a title company to conduct a title search, but it doesn’t hurt to ask during the homebuying process to ensure the property is unencumbered.
How an Unencumbered Asset Works
If an asset is unencumbered, that means it is free and clear from any liens or claims from the government or financial institutions. The owner listed on the title is the sole owner, and the asset can easily be sold or transferred to a new owner. For example, if a homeowner pays off their mortgage in full, they own the house free and clear. They can easily sell it to a new homeowner.
A vehicle is another good example of an asset that may be unencumbered. When someone buys a car, they may finance it with an auto loan, eventually paying for it in full and owning the car free and clear. If the owner doesn’t make their loan payments, they risk losing the car—the financing company could seize it as collateral. If you’re buying a used car, it’ll likely be unencumbered, but it doesn’t hurt to ask the seller or financing company to run a title search.
Unencumbered vs. Encumbered
If a property or asset is unencumbered, that means there are no liens, judgments, or claims against it. Since the current owner is in full possession of the property or asset, it can easily be sold or transferred to a new owner.
An encumbered property is an asset with underlying claims against it. This can take many different forms, from mechanic’s liens to legal judgments. The encumbrance must be dealt with before the owner can sell the property. Encumbrances are often real problems in real estate transactions, which is why a title search is required before you can close on a home.
|Unencumbered Asset||Encumbered Asset|
|No underlying liens, judgments, or claims on the property||There is an underlying claim on the property like a lien or legal judgment|
|The current owner is in full control of the property||The current owner is not in full possession of the property|
|The property can easily be sold or transferred to a new owner||Any encumbrances must be removed before the property can be sold|
- An unencumbered property is free from any underlying claims, like tax liens or legal judgments.
- Since the current owner is in full possession of the unencumbered property, it can easily be sold and transferred to a new owner.
- In comparison, an encumbered property has underlying claims against it.
- When you buy a home, your lender will require a title search to ensure the property is clear of any encumbrances.
- If you unknowingly purchase an asset with encumbrances, you’ll become responsible for the claims.