Encumbrance, Defined And Explained

Whether you own a house or are looking to buy property, it’s important to know there will likely be some limits on what you as the owner can do with the property. These limits are known as encumbrances and are placed on the property itself, not the owner.

If you’re looking to buy a home, it’s key to know how the property is encumbered before you purchase the property. Let’s learn more about what an encumbrance is and answer any questions you may have about this type of restriction.

An encumbrance is a limit on how an owner can use real estate. This claim is brought up by a party who is not the owner and restricts what an owner can do with the property. An encumbrance can create a cloud on the title of a real property. This type of limit can also allow the property buyer to back out of the sale and possibly seek damages in some jurisdictions.

Believe it or not, nearly every property in the United States has at least one encumbrance, sometimes referred to as an incumbrance.

Some encumbrances can affect the value or marketability of a property, while others don’t. Many encumbrances are welcomed by an owner, like zoning laws that prevent homes in an area from being used for commercial purposes. Others can be more troublesome, like liens placed on a property that seek repayment of debt.

An encumbrance can affect the transferability of a property and restrict its free use until it is lifted.

Encumbrances can cover a variety of financial and non-financial claims on a property. The most common types of encumbrances are legal encumbrances, financial encumbrances, easements, restrictive covenants and leases. Let’s talk more about each of these encumbrances and explain what their implications may be for buyers.

Legal Encumbrances

Encumbrances are created by the operation of law, like environmental regulations or zoning laws. These restrictions don’t affect the sale of the property, but rather its uses. When dealing with legal encumbrances, home buyers are expected to do their due diligence to understand how a property they are interested in purchasing can be used.

Financial Encumbrances

Financial encumbrances, called liens, are debts incurred by owners that are lodged against the property. Two common types of liens are mortgage liens and mechanic’s liens.

A mortgage lien allows homeowners to afford a house over time instead of having to pay for it in full upfront. Lenders will use the home as collateral, but it won’t be affected if the mortgage payments are made on time.

A mechanic’s lien is used by builders, contractors and construction firms to afford building or repairing structures. In this case, the lien guarantees that workmen are paid if liquidation occurs.

Easements

An easement gives a person or an organization the right to use another owner’s property for a limited specific purpose. For example, utility workers could have an easement to gain access to a homeowner’s property to service their equipment. In addition, a landlocked neighbor may have an easement over a homeowner’s property to access the road. Easements run with the property, so a new owner can’t prevent the easement beneficiary from using it.

Restrictive Covenants

A restrictive covenant is an agreement to either take or refrain from taking a specific action on a property. Restrictive covenants are common in neighborhoods that follow a homeowners association’s rules. For example, an HOA may require that a home meet certain maintenance standards such as frequent lawn mowing or regular house painting.

Encroachments

An encroachment is when someone who doesn’t own the property somehow interferes with their neighbor’s property. This could be anything from building a fence that crosses over the property line or even a structural addition that extends beyond the legal property boundaries. Depending on the situation, encroachment can either be intentional or harmless but it can lead to liability issues, property damage and even problems at the time of sale.

Leases

A lease is an agreement to rent a particular property for a certain amount of time at a certain cost. A lease gives the leaseholder rights that are unaffected by a sale of the leased property. It’s a right to use the land in a particular way that can’t be blocked by a new owner.

Now that we’ve talked about different types of encumbrances, let’s explain how you can find out if a property is encumbered.

A title search and title insurance are the best ways to learn if there are encumbrances on a property. These tactics can also protect a homeowner from any reduction in the property’s value should it turn out that there’s an undiscovered encumbrance on your property.

To go more in depth, a property title search is a probe into a property’s public records to confirm the property’s rightful legal owner and to look for any claims or restrictions that may exist. After a title search is conducted, a homeowner can get title insurance to protect against certain claims or defects in a property’s title.

If you’re interested in learning more about a property’s encumbrances, talk to a real estate professional. A good real estate attorney can advise you about encumbrances and whether your purchase of a property should continue.

Almost all property, particularly in densely populated areas, is encumbered in one way or another.

If you’re thinking about walking away from an encumbered property, take some time to learn more about the encumbrance and don’t worry about what the restrictions might mean. It’s much more important to understand the encumbrance on a property and be sure that it won’t interfere with your enjoyment of the property before you walk away entirely.

However, there are some serious encumbrances that you should also be aware of because they could become the responsibility of the new owner if not settled before closing. This category includes financial encumbrances aside from the mortgage, which is paid off at closing with the proceeds of the buyer’s mortgage.

As always, make sure to consult with a real estate professional about the restrictions of a claim before purchasing property that is encumbered.

To refresh your memory, an encumbrance is a limit on how an owner can use real estate. These limits are brought up by a third party and are placed on the property itself, not the owner. As you now know, it’s common for nearly every property to have at least one encumbrance on it. There are financial and nonfinancial claims, which can include easements, liens, leases and restrictive covenants.

If you’re ready to buy a home and become a property owner, apply for a mortgage today. You can also speak with one of our Home Loan Experts at (833) 326-6018.