A real estate encumbrance burdens a property's title, limiting or restricting the transfer of ownership. Several entities can encumber real estate, and there are many types of encumbrances. An encumbrance ties a financial liability, claim or regulation to the property. It obligates you, as the owner, to deal with the encumbrance before you can sell, refinance or otherwise change ownership to the property.
A home acts as collateral for a number of debts. Certain creditors can encumber your home to secure repayment of a loan or service rendered to you, the owner. An encumbrance can prevent you from selling and diminish the value of your home and the marketability of its title. A future owner must deal with the encumbrance, legally or financially, if she takes ownership of the home. Depending on the type of encumbrance, the creditor can sell an encumbered home to recoup its losses, making it a powerful tool for securing repayment of debts.
Common encumbrances on real estate include mortgages, deeds of trust, property tax liens, income tax liens, mechanic's liens, easements and water rights. Contractors can encumber your house with a mechanic's lien for unpaid materials and work completed on your home. An easement, or the permission or right to use your land for a specified purpose, may be placed by a utility company, your local jurisdiction and even neighbors who cross through your property to access their home. Encumbrances may be consensual or non-consensual. For example, you may agree to certain encumbrances, like a mortgage, but liens for unpaid debts don't necessarily require your permission.
Depending on your state and the specifics of your home loan agreement with your lender, either a mortgage or deed of trust may encumber your property. Both allow the lender to take ownership of the home and sell it through the foreclosure process, but a deed of trust is usually a better encumbrance for lenders to use. When the lender encumbers with a trust deed instead of a mortgage, the lender doesn't need court permission to foreclose.
Documents showing encumbrance details are usually recorded with the county recorder or registry of deeds. The encumbrance becomes a matter of public record, which you or a potential owner can research and find through a title search. For example, before buying a home, most buyers purchase title insurance and perform a title search to ensure the home's title transfers free of encumbrances. Any encumbrances that show up in the title search must be paid or otherwise settled before the deal can happen. Before encumbering your property, a creditor usually notifies you of its intent to encumber during its collection process or upon loan agreement.
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