Lien vs. Encumbrance: What’s the Difference?

Oddly enough, owning a home does not give you complete control over it. There may be a variety of limits or claims on your property rights, including liens and encumbrances.

Liens and encumbrances are different – and understanding these differences will help shed light on the broader topic of titles and other legal matters around homeownership. 

We’re covering every angle in our rundown of liens and encumbrances. 

What Are Encumbrances?

An encumbrance is any claim that limits or restricts the owner of a piece of property from enjoying full use of it. In real estate, an encumbrance can be a legal right or interest someone has in your property. 

An encumbrance does not have to be a monetary burden, but it can be. It helps to differentiate encumbrances by categorizing them as financial or nonfinancial.

• Financial encumbrances: Loans that use your home as collateral, judgment creditors who obtained a judgment and lien to collect unpaid debt, back taxes and other financial entanglements can all be considered financial encumbrances. 
• Nonfinancial encumbrances: The encumbrance can range from something as simple as a neighbor launching their boat from your lake access to preventing a homeowner from using resources on their land, like restricting logging rights. 

Understanding the difference between financial and nonfinancial encumbrances can be the key to differentiating between liens and encumbrances. 

Let’s take a look at different scenarios when we might encounter a financial encumbrance:

• Outstanding property taxes can result in a property lien from a government agency or state or local tax authority.
• Real estate purchased with a loan gives a lender security interest in your property.
• Property that is part of an estate may have financial encumbrances from creditors attached to the estate.

For the smooth transfer of the ownership of a home, all financial encumbrances, including unpaid liens, must be cleared. Check the encumbrance certificate when you buy a house to ensure there are no legal disputes or claims on the property that will prevent you from purchasing (or using) the property. 

What Are Liens?

All liens are encumbrances, but not all encumbrances are liens. A lien is a type of encumbrance that protects a lender’s or creditor’s rights. They are almost always financial and allow the lien holder to pursue legal action to collect on a lien if a loan defaults. 

The most common types of liens are mortgages, home equity loans and home equity lines of credit (HELOCs). These liens are voluntary because you’re allowing the lender to take ownership of your home if you default on your loan. 

There are also involuntary liens, which may be put on your home if you are unable to pay a debt.

• IRS lien: The IRS can place a federal tax lien against your property if you owe back taxes. 
• State tax lien: State tax authorities can put a lien on your house if you have unpaid state or federal taxes. 
• Judgment creditor lien: When you owe a creditor, they may pursue a judgment against you and place a lien on your property.
• Mechanic’s lien: A contractor who works on your house can put a mechanic’s lien on your property if you don’t pay them for their services.

What Are Common Types of Encumbrances Besides Liens?

Both liens and encumbrances put a legal obligation on a homeowner. Their differences lie in their restrictions. A lien puts a financial obligation on a homeowner, while an encumbrance may not always be financial. The most common types of encumbrances are:

Easements

An easement, or easement agreement, gives an individual or entity the right to use someone else’s property for a specific purpose. 

For example, utility companies may have easements to put power lines or phone lines across your property. Or you may have an easement agreement with your neighbor, allowing them to use your driveway to access their property.

Encroachments

An encroachment is an unauthorized intrusion onto neighboring land. This can happen when a neighbor builds a structure, such as a fence, that crosses your property, when someone dumps trash on your land or roots from a tree on an adjoining property grow onto your land.

Encroachments can be a minor nuisance or serious enough to decrease the value of your property.

Deed restrictions or restrictive covenants

A deed restriction or restrictive covenant is an agreement between a property seller and a home buyer that controls how the buyer uses the property.

This is a common aspect of real estate, especially when homeowners associations (HOAs) are involved. An HOA can restrict the use of the property by limiting pets, smoking and gatherings. Review any deed restrictions or covenant agreements before signing a lease or purchasing a property so you know whether the rules and regulations fit your lifestyle. 

Lease

A lease is an agreement that allows one party to use the property of another party. In real estate, a lease generally allows a tenant to pay rent to live or conduct business on the landlord’s property. A lease is considered an encumbrance because while the owner doesn’t give up their title to the property, they allow the tenant a certain level of use of the property based on the terms of the lease. 

Why Is It Important To Know About Liens and Encumbrances?

As a new home buyer, you might wonder how and when liens and encumbrances might come up. After all, this is why we have real estate agents and loan officers, right? Wrong.

While real estate professionals will do their best to help you avoid any issues, it is smart to keep an eye on the home buying process. Being informed about liens and encumbrances can help you avoid stressful surprises down the road.