What Is an Encumbrance and How Does It Work?

Existing Home Owners, Home Owner Tips, Mortgages


If you’ve never been to a closing, it pretty much looks like this: You sign a bunch of paperwork, pay your closing costs and get a mortgage. Then the moment you’ve been hotly anticipating arrives, and you finally get the keys to your new home from your real estate agent. 

Once you’ve cemented your status as a homeowner, you’ll likely want to make a few home improvements, like, say, a swimming pool in your backyard. 

But before you can decide between a concrete or fiberglass pool, you discover a restriction (aka an encumbrance) that won’t allow you to install a pool, effectively pulling the plug on your plans. 

So what’s an encumbrance? Besides being the thing that ruined your pool party plans, an encumbrance (sometimes called a title defect or deed restriction) is an umbrella term that describes anything that limits the use or transfer of a property.

Keep reading to learn what you need to know about encumbrances in real estate. What you learn can help you develop realistic expectations as a homeowner (and potentially save your summertime plans!).

Real Estate Encumbrances, Explained

Homeownership comes with a bundle of rights. The bundle of rights outlines what you’re allowed to do with your property and – just as importantly – what you’re not allowed to do.

You may encounter many different types of encumbrances during your home buying journey, including liens (which would include your mortgage), zoning restrictions and building restrictions.

Legally, home sellers are required to disclose the existence of any encumbrances to buyers. However, confirming (or even being aware of) encumbrances isn’t always easy. That’s why prospective home buyers must do their research and understand their rights.

In some cases, encumbrances are insignificant inconveniences. For example, zoning laws might prevent you from tearing down your home and building an industrial coal plant – a right you had no intention of exercising in the first place. 

But, in other cases, an encumbrance might cause the sale of a property to fall through. If, for example, there’s a substantial lien on the property, the owner might not have the legal right to sell the property.

How To Find Out if a Property Has Encumbrances

If you want to figure out if a property has encumbrances, you can check with your county recorder’s office, but your best bet will be to use a title insurance company to find any encumbrances. 

If a warranty deed comes back with a clear title, that’s one less thing a buyer has to worry about. 

There are a lot of different types of encumbrances you might encounter in the home buying process. By taking some time to look at the finer details and understand what you are getting into, you’ll be much more likely to make an informed decision.

Title Search

Title insurance is usually required when buying a home. With a title search, a title company compiles a title report listing all known encumbrances. No encumbrances = a clear title.

Common Types of Encumbrances

An encumbrance can be created based on how you bought a home, the home’s location, the type of property you own, your neighbors, local laws and how information is recorded at your county recorder’s office. 

Mortgage 

If you borrowed money from a lender to buy your home, your mortgage is an encumbrance. A lender only transfers ownership of a property to a homeowner once the mortgage is “satisfied,” which usually means paying off the mortgage.

Deed of trust

A deed of trust is similar to a mortgage, but it involves a trustee, not a lender. And whether a deed of trust or mortgage is used for a home sale will vary by state. 

The trustee acts as a neutral third party until the mortgage loan is paid off. Once the deed of trust is satisfied, the trustee uses a deed of reconveyance to transfer title to the homeowner. 

Zoning laws are legal encumbrances that limit the use of a property and control whether a property can be used for commercial, residential, industrial or other purposes.  

You may even encounter additional limitations within each zoning category. For example, you may not be allowed to tear down a house and replace it with an apartment building, even though both houses and apartment buildings are types of residential properties.

Be Sure To Check For Zoning Laws

Almost every property will have limits on the types of buildings you’re allowed to build on it.

Lien

A lien is a legal claim against a property. In most cases, property liens must be satisfied (which usually means paying them off) to sell a home. 

Having liens filed on your property can be stressful, but they can be removed. In some cases, you might want to consider speaking with an attorney before making any payments.

Subcontractor Lien

If you worked with a general contractor who didn’t pay their subcontractors, even if you paid the general contractor, the subcontractors can put a mechanic’s lien on your home.

Easements

An easement is an encumbrance that gives a party the right to use some or all of your property for a specific reason. For example, your next-door neighbor might need to use part of your driveway to access their property. An easement would give them that right.

You can use several strategies to remove an easement, including coming to an agreement with the other party, allowing an easement to expire or challenging an easement in court.

Encroachment

In real estate, an encroachment occurs when one party builds or extends their property onto a neighboring property they don’t own. 

FYI: The most common type of encroachment is overgrown plants. 

Encroachments are typically noted during property surveys or inspections. In many cases, the encroachment is something that can be physically removed with the consent of both parties. But if no one’s budging, you may need to take your dispute to court.

Lease

A lease allows someone to use someone else’s property for an agreed amount of time. Let’s say your property has a carriage house or detached apartment. You can lease your extra space to a tenant.

Even if you sell your property, the tenant often continues to possess the right to live there until their lease expires. This is why a lease is broadly categorized as an encumbrance. 

Restrictive covenants

A restrictive covenant is a clause that restricts how you use a property – and restrictions will vary. Some covenants restrict unconventional uses of land, like raising goats in a residential area. 

Restrictive covenants typically have an expiration date, but they can be challenged in court.

Don’t Let Encumbrances Get In Your Way

Encumbrances aren’t uncommon, but depending on which ones they are, they might be too much for you to deal with. If an encumbrance cramps your lifestyle or your future financial goals, always remember that you have the option to walk away from a deal and find one that meets your needs.



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