Real Estate

What Is an Encumbrance?

What Is an Encumbrance? Any legally recognized restriction on the use or transfer of the property is considered an encumbrance. A property that is unencumbered by any obligations is uncommon.

Definition and Example of an Encumbrance

An encumbrance is a legitimate claim against real estate. An obvious encumbrance is a mortgage; if a homeowner defaults on their payments, the lender has the right to foreclose on the residence. An encumbrance is any claim or lien made against real estate. Other instances of encumbrances are zoning regulations and environmental constraints.

Definition and Example of an Encumbrance
Definition and Example of an Encumbrance

How Encumbrances Work

Depending on nature, encumbrances operate in different ways. Encumbrances like liens can make it difficult to transfer property. Others, such as zoning regulations, barely affect the purchase or sale of real estate. A property is deemed “unencumbered” when it is free of any encumbrances.

Here are some typical encumbrance types and how they work.

Deed of trust or mortgage

The promissory note, which is an obligation to pay, and the mortgage or deed of trust, which secures the note and is recorded, are often the two legal papers that make up a financial transaction when a homebuyer finances the purchase of a home. A mortgage is an encumbrance, albeit it differs differently from a deed of trust.

The encumbrance is removed from the property in the public records after a mortgage or deed of trust has been paid off. A “reconveyance deed” is a standard document to remove an encumbrance that grants the property owner a clean title.

Voluntary liens

An owner voluntarily signs a voluntary lien, which is typically listed against the property in public records. A second loan, a home equity line of credit, or even a refinance of current secondary financing might be used to create a lien in exchange for the transfer of funds.

There may be no exchange of money in some circumstances, such as when a homeowner uses a line of credit to borrow money. A homeowner might take up a line of credit as an emergency source of finances when interest rates are low. The homeowners must record a lien release even if the account is closed without ever being utilized.

Involuntary liens

The terms “lis pendens” and “mechanic’s lien” refer to two involuntary lien kinds that are fairly frequent. In this case, the term “involuntary” denotes the fact that the homeowner was not necessarily aware that a lien may be placed against the residence. Lis pendens denotes an ongoing legal proceeding. For instance, a seller might have committed to selling to a buyer, but if the buyer couldn’t close on time for any reason, the seller would have unilaterally and without the buyer’s permission terminated the contract.

Consider a scenario in which the seller refused to give the existing buyer extra time to close because they wanted to sell to a different buyer for a higher price. The current buyer may bring legal action against the seller to prohibit the transfer of title to the new buyer-seller and record a lis pendens, which would prohibit the sale until the court action was resolved.

A contractor or subcontractor will typically file a mechanic’s lien for unfinished work or materials. For a title company to offer a title policy without identifying the encumbrances as exceptions to title insurance, all involuntary liens must be paid off.

Easements

Easements
Easements

When the landowner retains ownership but grants another party the right to use it for a certain purpose, this is known as an easement. An easement for utility maintenance is one sort of easement that is frequently used. Access (right of way) to a piece of land that is landlocked and lacking a road could potentially be provided through an easement.

Because they restrict actions and impair property rights, easements are encumbrances. For instance, a swimming pool cannot be constructed over a space designated for a city sewer line. If you do, the city may remove the pool without your consent.

As well as frequently appearing on the assessor’s map, easements are mentioned in your title insurance policy.

Check Also:

How Accurate Is a Zillow Home Estimate? Latest Update

What Is a Promissory Note?

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