Liens And Encumbrances: The Difference
Sidney Richardson5-minute read
February 27, 2023
Whether you’re buying a house or you’re already a homeowner, “encumbrance” and “lien” are two real estate terms you should make sure you’re familiar with. Buying a home is likely one of the biggest investments you’ll ever make, so it’s crucial 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.
Understanding Encumbrance Vs. Lien
Before we go into the details of what encumbrances and liens are, let’s talk about what differentiates the two. 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.
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What Are Encumbrances?
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 or cannot 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.
Types Of Encumbrances
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 property, real or personal, that allows a party to use that piece of property as collateral for a debt. If you have a mortgage, there’s probably a lien on your house – it just means that if you default on your payments, your lender will have the legal ability to foreclose on your home to attempt to recoup the loss.
A lien is typically settled if a home is paid off or sold, but to make sure there are no outstanding mortgage or tax liens on a home, a title search is usually done by lenders during the mortgage process. Title searches uncover any potentially outstanding liens on a home that may need to be dealt with before a title can change hands.
Easements are encumbrances that affect who owns what 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. An easement might allow neighbors or the general public to use a beach that’s part of your yard – or it could allow a third party such as a utility company or the local government to place an electrical pole or public traffic sign in your yard.
Deed restrictions or “restrictive covenants” are encumbrances that determine how a piece of property can be utilized. A home with deed restrictions on it 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 and much more. 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 the corner or side of a neighbor’s barn or shed being slightly over your property line.
What Does It Mean To Be Free From Liens And Encumbrances?
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.
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Why Is This Important To Know When Buying A House?
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 are 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.
Liens And Encumbrances On Personal Property
While most commonly associated with real estate, liens and encumbrances can be applied to personal property too, like cars, boats and other personal assets. In the event that you don’t repay a debt, the lender can attach a lien or encumbrance to the property, making it difficult to sell.
The Bottom Line
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 is 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 subjects your property to 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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