How Encumbrances Work
The way encumbrances work varies, depending on the type. Some encumbrances, like liens, complicate property transfers. Others, like zoning laws, have minimal impact when you buy or sell property. When a property no longer has any encumbrances, it’s considered “unencumbered.” Here are common types of encumbrances and how they work.
Deed of trust or mortgage
When a homebuyer finances the purchase of a home, that financial transaction typically consists of two documents: the promissory note, which is an obligation to pay, and the mortgage or deed of trust, which secures the note and is recorded. A mortgage is slightly different from a deed of trust, but beach is an encumbrance. When a mortgage or deed of trust has been paid off, the encumbrance is then removed from the property in the public records. One common document to remove an encumbrance is called a “reconveyance deed,” which gives a clear title to the property owner.
Voluntary liens
A voluntary lien is a document that an owner willingly signs, and it’s generally recorded against the property in public records. It could be a lien in exchange for money changing hands, such as a second loan or a home equity line of credit, or even a refinance of existing secondary financing. In some cases, such as a line of credit, there might be no exchange of money until the homeowner actually taps the line of credit and borrows money. When interest rates are low, a homeowner might take out a line of credit as an emergency source of funds. Even if the account is closed without ever being used, the homeowners must still record a release of the lien.
Involuntary liens
Two fairly common types of involuntary liens are a lis pendens and a mechanic’s lien. Here, “involuntary” means that the homeowner did not necessarily agree that such a lien could be filed against the property. Lis pendens means that legal action is pending. For example, a seller agreed to sell to a buyer, but the buyer, for whatever reason, could not close on time, so the seller canceled the contract unilaterally, without the buyer’s consent. To further complicate the matter, suppose the seller desired to sell to another buyer for more money and refused to extend the time to close for the existing buyer. To prevent the seller from transferring title to the new buyer, the existing buyer might file a court action against the seller and record a lis pendens, which would prohibit the sale until the court action were resolved. A mechanic’s lien is generally filed by a contractor or subcontractor for work or materials that remain unpaid. All involuntary liens must be paid off for a title company to issue a title policy without naming the encumbrances as exceptions to the title insurance.
Easements
An easement occurs when the property owner retains title to the land, but another entity also has the right to use the land for a specific reason. One common type of easement is an easement for maintenance of utilities. An easement could also be granted for access (right of way) to a parcel of land that is landlocked without a road. Easements are encumbrances, because they prohibit certain actions and affect rights to the property. For example, you cannot build a swimming pool over a location reserved for a city sewer line. If you do, the city can dig up the swimming pool without your permission. Easements are noted in your title insurance policy and often appear on the assessor’s map.
