Whether you’re buying a house or you’re already a homeowner, “encumbrance” and “lien” are two real estate terms you should be familiar with. Buying a home is likely one of the biggest investments you’ll ever make, so it’s important to understand any and all legal interests and limits on what you or other parties can do with your property.
Let’s go over what liens and encumbrances are, including how they’re different and how both might affect you and your home.
A lien, which is a form of encumbrance, gives a claim holder the legal right to seize the real or personal property of a borrower if they fail to satisfy an outstanding debt or obligation.
An encumbrance, on the other hand, is a broader type of claim that is attached to a property and brought up by a party who is not the owner. An encumbrance typically restricts what a property owner can do with their real estate in some way.
An encumbrance is a broad term that refers to a type of limit on how a property owner can use or manage their property that is brought up by another party. Encumbrances are not always monetary in nature and can be a lot of things, from zoning laws that might determine whether you can use a property for commercial purposes, to liens, which allow another party such as a lender to take your property as collateral if you fail to repay a debt.
Almost every home in the country has at least some kind of encumbrance – so they aren’t necessarily always a bad thing. Some encumbrances, however, can affect the sale of a property and can even reduce property value unless they are resolved.
There are many different types of encumbrances, both financial and nonfinancial in nature. Let’s take a look at a few common types of encumbrances you might expect to encounter and how they could affect you as a homeowner or a home buyer.
A lien is a legal claim against a piece of personal or real property that allows a party – like a lender or creditor – to use that piece of property as collateral for a debt. If you have a mortgage, there’s probably a lien on your house. Essentially, this means that if you default on your payments, your mortgage lender will have the legal ability to foreclose on your home to attempt to recoup the loss.
In addition to mortgage liens, some other common types of liens include:
A lien on a home is typically settled if a home is paid off or sold. In order to ensure there aren’t any outstanding mortgage or tax liens on a property, lenders typically perform a title search during the mortgage process. Title searches uncover any potentially outstanding liens on a home that may need to be dealt with before the house title can change hands.
Easements are encumbrances that affect ownership on a piece of land. Typically, an easement on a property means that the land belongs to the homeowner, but another party has been granted permission to also use or place something on the property.
For example, an easement might allow neighbors or the general public to use a beach that’s part of your yard. It could also allow a third party, like a utility company or the local government, to place an electrical pole or public traffic sign in your yard.
Also called restrictive covenants, deed restrictions are encumbrances that determine how a piece of property can be utilized. Deed restrictions on a house might control what type of fencing (if any) you’re allowed to put up around your yard, whether you can run a small business from your home, whether you can build a shed on your property or other limitations.
Deed restrictions are often tied to a community homeowners association (HOA) or local government.
An encroachment is a legal situation that arises when something is built by a neighbor on your property or perhaps between your two properties. Even if you’re okay with your neighbor building a structure partially on your land, an encroachment can hurt your property value and cause title problems because it makes property lines more difficult to determine.
Most encroachments are accidental or unintentional, though situations vary. A common example of an encroachment is when the corner or side of a neighbor’s barn or shed is slightly over your property line.
You may be wondering if it’s possible for a property to be completely free of any encumbrances, including liens. While most properties have some sort of encumbrance tied to them, you actually can own a home without any lien or other legal interest held against it. This is often called owning a home “free and clear” or having a clear title.
To own a home free and clear, meaning there are absolutely no legal encumbrances, a homeowner must completely pay off their mortgage and make sure there are no outstanding liens against the home that must be resolved.
If you’ve paid off your home loan, there is no longer a reason for a lender to hold the property as collateral – and if there are no other legal issues surrounding the property, like encroachments or deed restrictions, you can in fact be completely free from liens and encumbrances.
It’s important to understand what encumbrances (especially liens) are when buying or owning any home because they can directly impact you, your property, and your finances. If you’re buying a home with existing encumbrances, it can sometimes prevent you from being able to purchase the house – or can cost you money later on.
For example, if a title search is done and shows that the title of a home you’re looking at is not clear, that could mean another party has a claim against the property – which is a situation you likely won’t want to enter into as a home buyer.
That said, before buying any piece of real estate, it’s always a good idea to do a title search and make sure there are no outstanding liens or concerning encumbrances on the home. In fact, your lender will likely require one.
While most commonly associated with real estate, liens and encumbrances can also be applied to personal property, like cars, boats or other assets. If you don’t repay a debt, the lender can attach a lien or encumbrance to the property, making it difficult to sell.
As a homeowner or home buyer, it’s important to understand what encumbrances and liens are and how they can impact your home. While it’s important to be aware of any encumbrances on a home, you should also keep in mind that there are many types of encumbrances and not all are necessarily bad. Simply having a mortgage means your property has at least one type of encumbrance, so as long as you make loan payments on time, it usually isn’t a big deal.
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