Liens and encumbrances: What to know

One of the last steps in closing on a home is the title search, which will tell you whether the property you’re buying is free from liens or encumbrances. You’ll usually see both terms used together, but they don’t mean the same thing. An encumbrance is a broad term for anything that gives someone else a claim on a property, like a debt or a rule about how the property can be used. A lien is a type of encumbrance that refers to debts related to the property, such as unpaid property taxes.

What is a lien?

A lien is an encumbrance that makes a financial claim on your property. When you borrow money and use your home as collateral, the lender places a lien on your home to ensure repayment. It gives the lender a priority claim to money generated by a sale of the home to satisfy the debt. If you fail to repay the loan, the lienholder may be able to force a sale of the home to recoup its losses from the proceeds.

Common types of liens include:

• Tax liens. If you fail to pay your property taxes, the government can place a tax lien on your home. This allows the government to claim what it's owed in taxes from the sale of the home.
• Mortgage liens. If you have a mortgage, your lender places a lien on the property until the loan is fully paid off. This is the most common type of lien.
• Construction lien or mechanic’s lien. If you hire a contractor to work on your home and don’t pay them, they can file a lien to try to collect what they’re owed. This can happen if there’s a dispute or if you missed payments.
• Judgment lien. If a court rules against you in a legal dispute, it may allow the other party to place a lien on your property. This allows them to claim their settlement when you sell your home.

A lien against your home is a serious obstacle. Lenders likely won’t allow you to refinance your mortgage without settling the lien. You also will need to resolve the lien to clear the title so you can sell it.

What is an encumbrance?

An encumbrance means someone else has some rights to your property, which can limit what you can do with it.

Here are a few examples:

• Zoning laws. If you live in a neighborhood that restricts homes to residential use, you won’t be able to use your home for any business purposes.
• Easements. If your neighbor needs to drive through part of your driveway to access their home, you must let them use it. That shared access is called an easement.
• Tax liens. If you owe back taxes to the IRS, for example, the government can place an ownership claim on your home until you pay off the debt.
• Restrictive covenants. If you move into a neighborhood with a homeowners association, you’ll need to follow its specific rules, such as using only approved paint colors or a particular type of fence. These rules help to maintain a consistent character in the neighborhood.

Encumbrances may also result in a cloud on title, which means your ownership rights aren’t completely free and clear. That can create problems when you try to sell the property later.

Other types of encumbrances

There are several types of encumbrances that may affect your property. Some are financial, such as when a debt remains unpaid. Others are nonfinancial and relate to how a property is used, such as when your neighbor’s tree starts growing into your yard.

Easements

Is an easement an encumbrance? It sure is. Easements fall under the umbrella of encumbrances. With an easement, you are legally obligated to allow someone else to use or access a specific part of your property without it being considered trespassing. Even though this other party doesn’t own the land, you still must let them access it.

For example, if you have a power box or water line on your property, you must let the utility company enter your yard for inspections or repairs. Or perhaps your neighbor’s property is landlocked, and they need to build a driveway or path along the edge of your land so they can access the main road.

Easements are usually permanent and stay with the land, regardless of who owns it. Therefore, if you sell your home, the easement on that property won’t go away. It will apply to the new owner if you sell it.

Temporary easements also last for a specific time, usually to allow construction, repairs, or building projects.

Deed restrictions

Deed restrictions, also called restrictive covenants, are written into a property’s deed and control what you can and cannot do with the property. Typically, an HOA or local government enforces these rules.

Some examples include:

• Fence height and material. Some HOAs may set rules about how high your fence can be and which materials you use. You’ll likely need the HOA’s approval to ensure it complies with the rules.
• Accessory dwelling units. Cities often limit the size of an ADU, like a guest house or backyard rental unit.
• Structures in the front yard. Some HOAs restrict what you can place in your front yard. This can include sheds, signs, or other types of structures.

Because deed restrictions are established in the deed itself, they automatically transfer to the next owner when the home is sold. That’s why it’s important to know what rules come with the property before you buy it.

Encroachments

An encroachment is when someone uses part of your property without permission or legal rights. In simple terms, it’s a form of trespassing, even if it’s unintentional.

Encroachments count as encumbrances because they can limit how you use your property. When someone uses part of your land without permission, it can make it harder for you to use the space or sell the home later.

Here are a few examples:

• Overhanging trees. Your neighbor has a big tree, and its branches hang over the fence into your yard.
• Property line issues. Your neighbor accidentally builds a fence two feet over the designated property line.
• Public use concerns. Your local park puts a walking path across half of your front yard.

If an encroachment is unaddressed for many years, it can become a serious issue. In some cases, it may even become a legal easement, granting the trespassing party permanent rights to use that part of your land.

What does it mean to be free from liens and encumbrances?

If a property is listed as free from liens and encumbrances, it means that there are no known legal claims or restrictions associated with it. In other words, the title is clear, and the current owner has full ownership of the property.

How do you find liens on a property? Title issues often arise during a title search when purchasing a home. A title search documents the legal history of the property, also known as chain of title. So, when you see a clear title, it’s a good sign and usually means you won’t run into ownership or legal issues from the previous owner down the line.

How do encumbrances and liens affect home buying?

Selling a property with a clouded or defective title is a big red flag to buyers. It can make it difficult, or even impossible, to sell your home. That’s why it’s usually necessary to clear up any title issues before listing your home.

For example, if you have outstanding liens, you’ll need to make sure those debts are paid in full. If you’re unable to do this before listing, you can still resolve it during the sale by ensuring that the lienholders, such as your lender, are paid off at closing.

Keep in mind that even if a home has a clear title, certain issues can still slip through the cracks, such as encumbrances, recording mistakes, or old claims that were overlooked. These issues could pop up later and greatly restrict your ownership rights.

You can protect yourself in case the title search misses any liens or encumbrances that later come to light by buying title insurance. It protects you if someone shows up later and says they have a legal right to your property that wasn’t found in the title search.

Liens and encumbrances on personal property

Liens and encumbrances are not just for real estate. They also can apply to personal property and assets, such as a car or boat. As with real estate, if a debt goes unresolved, the property could end up with a lien, making it more difficult for you to sell.

The bottom line

Understanding the ins and outs of liens and encumbrances, as well as how to protect yourself from buying a home with title issues, can save you a lot of headaches and hassle down the road. Since these claims can restrict what you’re allowed to do with your property – even whether you’re able to sell it – it’s crucial to do your due diligence before buying or selling a home.

Start your path to homeownership by applying now and taking that first step.