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Encumbrances: What They Are And How They Work

5-Minute Read
Published on October 16, 2022
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Purchasing a home is an arduous journey, and closing day is usually a celebratory crossing of the finish line. However, an encumbrance can ruin this happy occasion by compromising the seller’s property ownership. As a result, an encumbrance can jeopardize a home sale, leaving buyers and sellers frustrated, with nothing to show for weeks or months of hard work and negotiation.

Home buyers in the late stages of their home purchase may have their title search reveal an encumbrance. Here are the types of encumbrances and how to handle them.

What Is An Encumbrance?

An encumbrance is a claim of ownership of a property. Generally, home buyers run into encumbrances during a title search, one of the last steps to buying a home. An encumbrance can delay or derail your closing at the last minute because it impacts the seller’s ability to transfer the property.

Examples of encumbrances include a lien against the property and a structure sitting on two separately owned lots. Encumbrances do not always affect a property’s value and might require a legal process to help resolve, depending on the type.

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How Does An Encumbrance Work?

How an encumbrance works depends on what type it is. Generally, an encumbrance affects a home buyer’s ability to purchase a property and requires resolution before the transaction can be completed. Addressing an encumbrance can be as simple as writing a letter or could involve legal proceedings.

Types Of Encumbrances And What They Mean For Homeowners

Common types of encumbrances are easements, encroachments, liens and deed restrictions. These types of encumbrances define what each party is entitled to and protect each party according to local law. Additionally, lenders and home buyers protect themselves through title insurance, which searches for claims against the property and prevents liability for the lender once the title has been transferred. Here are details on each type:

Easements

An easement grants limited property usage to an entity other than the owner. For example, a house that has an easement to an adjoining property might allow the owner of landlocked property a right of way across their neighbor’s property to gain access to a public road. Remember that while easement may allow another party to use the property, the owner retains the title.

Encroachments

An encroachment occurs when someone else (usually a neighbor) has a structure or plant sitting partially or entirely on your property. For example, a neighbor’s fence that strays into your property can cause an encumbrance. It’s crucial to address encroachments even if the issue doesn’t bother you.

Although conflicts over property lines can cause stress and cost money, an unaddressed encroachment can lead to a claim of adverse possession that gives ownership rights to the neighbor. Fortunately, a straightforward letter exerting your property right and consenting to your neighbor’s use of the property can defeat a claim of adverse possession.

Liens

A lien is a legal right to property under specific circumstances. Additionally, the owner can’t transfer the property unless they address existing liens during the sale. As a result, liens limit a homeowner’s sale of the property.

Mortgage Liens

One example is a mortgage lien, which gives a person or company a claim to a property until the owner repays the debt. For example, when a person takes out a mortgage, the lender will have a lien on the property until the homeowner pays off their mortgage.

The lien is for the lender’s security. If the homeowner defaults on the loan, the lien allows the lender to repossess the property. At closing, the seller must resolve the liens through cash reserves or profits from the home sale. Otherwise, lienholders have the right to stop the transaction until the owner satisfies outstanding debts.

HOA Fee Or Fines

Failure to pay HOA fees will result in a lien on the property. Similarly, failure to pay HOA fines or special assessments can also result in liens. Like a mortgage, it’s recommended that homeowners keep up with HOA fees and fines to avoid encumbrances.

Tax Liens

If you fail to pay property taxes, your municipality will put a tax lien on your property that takes precedence over all other creditors and can result in foreclosure, even if you have kept up with your mortgage. Most lenders require borrowers to pay their property taxes as part of their monthly mortgage payment – along with their homeowners insurance premiums – that go into escrow accounts that lenders manage.

Mechanic’s Liens

A professional who repairs your car, home or property can place a mechanic’s lien on your home until you pay the fees for their services. If this lien is somehow not paid when the owner sells the home, it stays with the property even after a transfer of homeownership.

CC&R: Covenants, Conditions And Restrictions 

If you’re considering the purchase of a home located within a homeowners association (HOA), you will have limits placed on your use of the property. These stipulations are known as Covenants, Conditions and Restrictions (CC&R). CC&R are part of the deed, so they cannot be ignored by homeowners. As a result, failure to comply with CC&R can lead to your HOA placing a lien on your home.

HOA rules can restrict a homeowner’s choices in various ways. For example, your CC&R may prevent you from roofing your house with a specific material or painting your house a certain color. Furthermore, some HOAs limit what kind of pet you can keep in the home or forbid all f pets.

Zoning

Zoning laws are municipal regulations that define what a property can be used for. For example, zoning laws may help ensure that a shopping mall doesn't go up in the middle of a neighborhood or that your next-door neighbor doesn't decide to build a large apartment building on their property. 

Claims Against Title

A title search can reveal pending lawsuits that seek a claim to a property, like a prescriptive easement, an encroachment, or other claims against the property. If your title search unearths claims against the title of the home you’d like to purchase, you’ll need to work with the seller, neighbors and claimants to resolve them.

Are Encumbrances A Problem?

Encumbrances might sound intimidating, but almost all property in the U.S. is encumbered. For example, easements allow public services like police, fire and utilities access to perform their duties or make necessary repairs.

Additionally, anyone with a mortgage has an encumbrance in the form of a lien against their home. However, the encumbrance doesn’t affect the situation unless the homeowner fails to pay their mortgage or is selling their home for significantly less than their remaining loan balance, which is rare.

Because encumbrances can have wide-ranging effects on property, it’s vital for homeowners to understand how an encumbrance affects the property, and decide whether they can live with those restrictions. If your home or the home you want to buy has encumbrances, it’s a good idea to consult a real estate attorney to review the details.

Can You Get Rid Of An Encumbrance On Real Estate?

Eliminating an encumbrance might be as easy as removing a structure from a property, or it might be as complex as carrying out a legal process. Encumbrances may require you to replot property lines, pay off a lien, or obtain an exemption from your lender or municipality. The document to remove an encumbrance is called a reconveyance deed, which conveys a clear title to the property owner.

The Bottom Line: Encumbrances Limit Property Use 

Encumbrances grant land usage to other parties, arise from neighbors keeping objects on your property and can guarantee creditors the right to your home until you repay specific debts. Therefore, it’s wise to understand the encumbrances on the home you’d like to buy before completing the transaction.

Preferences and circumstances vary, so everyone should evaluate for themselves whether the limit would be significant enough for them to walk away from the purchase of the property. Remember that some encumbrances don’t impact a homeowner’s daily life, while others can create pressing legal ramifications if left unresolved.

Learn more about buying and owning a home in our Learning Center.

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Headshot Ashley Kilroy

Ashley Kilroy

Ashley Kilroy is an experienced financial writer. In addition to being a contributing writer at Rocket Homes, she writes for solo entrepreneurs as well as for Fortune 500 companies. Ashley is a finance graduate of the University of Cincinnati. When she isn’t helping people understand their finances, you may find Ashley cage diving with great whites or on safari in South Africa.