Mortgages, Title Reports and Encumbrances

Obtaining a new mortgage or home loan requires that the mortgage lender obtain a title and title report on the property that will be used as collateral for the loan.  The title report will indicate the owner of the property, the taxes due and any encumbrances against the property.

An encumbrance is a claim, liability, or burden held by someone other than the titleholder which limits or restricts the titleholders’ rights or interest in the property.  It is the encumbrance created by the mortgage that gives the mortgage lender security for the home loan.  Encumbrances by there selves do not transfer ownership.  Encumbrances can be either governmental or private party in nature.  Easements, encroachments, mortgages and restrictions are all forms of encumbrances that affect the use of property. 

Encumbrances that affect the title are called liens.  Liens are the record of financial obligations owed by the title holder.  The liens give notice to the world that the property could possibly be sold to satisfy the debt, without the titleholders consent.

There are at least two important reasons why the mortgage lender reviews how encumbrances affect real property.  First, the mortgage request being processed will be a lien or encumbrance on the title and any other mortgages that need to be satisfied or paid are also encumbrances on the title.  Second, it is important that the mortgage lender understand the consequences of other encumbrances and how they may affect the secured property.  This is especially true in the event that the property must be sold at foreclosure or if the mortgage lender takes title to the secured property.  The mortgage lender will often not approve a home loan if the property that has the mortgage will have difficulty being sold or transferred. 
  
Liens are generally separated into two categories: general and specific.  A general lien is one that encumbers all of a debtor’s property both real and personal.  A specific lien applies only to the property specifically named in the lien.  Property taxes, for example, are specific liens that encumber only a parcel of real property.

Lis pendens is a term that describes pending legal action that can encumber a title.  If a creditor believes that he will not be paid, he may begin a court action to achieve a judgment to secure the debt owed.  This judgment gives him the right to place liens on the property of the debtor.  When a suit is filed, the person filing the law suit also has the right to record a notice, called a lis pendens, with the recorder in the county where the property is located.  The lis pendens gives notice to other creditors as well as to anyone who desires to acquire an interest in the property, that the property may be encumbered by the outcome of the lawsuit. 

A mortgage lender will be concerned about lis pendens filed against the title of a property intended to be the security for a home loan.

When there are multiple liens on a property, the priority of the lien is generally determined by the date of the recording.  The date that a lien is recorded in the office of the county recorder is most important.  Liens are given priority, for order of payment in the event of foreclosure, based specifically on the date that they are recorded.  Liens against real property including mortgages for home loans usually are be recorded with the county clerk in the county where the property is located.

The government also has the power to place liens or encumbrances on a property.  The government has four significant powers which it can exercise over real property: police powers, eminent domain, escheat and taxation.

Police powers protect and promote the health, safety, and general welfare of the people; these police powers also enhance value.  Police powers are protective powers, which are also an involuntary encumbrance on real property.  Specific police powers include zoning laws, building codes, subdivision regulations and environmental protection laws.

Zoning laws restrict the way an owner may use his property.  The purpose of zoning is to create uniform use of real estate in each area.  This uniformity protects the health, safety, and welfare of the community by keeping residences away from the noise, dirt, traffic and pollution caused by industry.

Variances and non-conforming uses are zoning issues that can impact a mortgage lenders position regarding a property.  If an owner believes that the zoning law governing his property is unjust, he may present his case to a zoning review board, sometimes called the zoning board of appeals.  If the zoning review board agrees that zoning for the property is unjust, the board will issue a variance permit (often called a variance) that exempts the owner from complying with that particular zoning law.  The zoning board can also issue a conditional use permit, which allows a variance subject to certain conditions.

Another exception to regular zoning ordinances is a non conforming use ordinance.  When the government changes the zoning for a particular area in a way that would not allow the current use of the property, the owner could apply for a non conforming use exception.  Once the zoning board approves the non conforming use the owner would be permitted to continue using the property as it was before the zoning changed.
 
Variances and non conforming uses are very different concepts.  When an owner has been granted the right to a non conforming use, the permission will usually terminate with any major change to the use, ownership, or major physical change to the property.  In contrast, when the owner has received a variance, the owner has the right to continue that use even after changes occur.

Mortgage lenders would be particularly concerned if a property being used as security is under non conforming use permit because the termination of the non conforming use could greatly affect the properties value.

Building codes set the standards for construction.  Building codes specify the materials to be used and also how the materials must be installed.  Before building a new structure or modifying an existing one, a building permit must be obtained from the building department of the governing authority, usually the local municipality.  Mortgage lenders must be concerned that building codes have been followed correctly during construction and when repairs have been done to the property being used as security.  Violations of building codes are punishable by fines, stoppage of construction, or even forced demolition of a building.

In recent years a number of laws to protect the environment have been passed by federal, state, and local government authorities.  These include rules regarding lead based paint, radon, asbestos and other pollutants.  These laws are important to mortgage lenders because if a property is found to be contaminated it can lesson the property’s value, make it worthless, or even create a cleanup cost exceeding the value.

Eminent domain is a process that permits the government to acquire privately owned real property for a public use or purpose, against the wishes of a private owner.  The process by which the government exercises this right is called condemnation.  To be successful in its condemnation action, the government must prove to the court that it is paying a fair market price and that the use for which it is taking the property is a greater public need or purpose than that of the owner.  The power of eminent domain could be used for example if the government needed to clear an area to build a new public highway.  However, the use does not have to be an ongoing public use like highway, park, or school, as long as the use benefits the public.  An example could be the city building a property with a store on it and selling it to a developer who will build a new store that is farther from the street and creates a safer traffic pattern for the public.

A mortgage lender would most likely not wish to lend, using a property as security, if the property was currently involved in a condemnation proceeding.

Escheat allows the government to claim ownerless land.  If a landowner dies without leaving a will and no heirs can be found, the ownership escheats, or transfers to the government.  This law has no real effect on the mortgage lending process.

Real estate taxes and other taxes create their own special liens.  Real estate taxes are specific liens which encumber only the specific property to which they are related.  Income taxes and other taxes owed by an individual become general liens which encumber all of his property.  There are two categories of real property taxes: ad valorem taxes and special assessments.

Ad valorem means “according to value”.  Ad valorem taxes are the annual taxes charged real property owners, according to the value of the property.  The local assessor determines the value of the property.  Ad valorem taxes are generally paid semi annually, sometimes in advance and sometimes in arrears.

If an owner fails to pay his property taxes, there is a lengthy process by which the county can collect the past due tax.  This process is designed to prevent errors and to protect against improper or wrongful taking of private property.  However, the government can eventually seize the encumbered real property and sell it at auction to satisfy the lien for unpaid taxes.  If the property is sold voluntarily, or at a foreclosure sale held to satisfy other debts, unpaid taxes remain a lien on the property.  The new owner may lose the property if the taxes and penalties are not paid.  Mortgage lenders often charge home loan borrowers a tax service fee at the loan closing which is a one time fee used to pay for monitoring the real estate taxes on the property to assure future delinquent real estate taxes do not impair the loan of the mortgage lender.

In contrast to ad valorem taxes, special assessments are imposed on a select community segment that will benefit from certain necessary improvements.  Examples of these local improvements include sidewalks, curbs, streets, lighting and water mains.  Special assessments for the cost of these improvements are divided among the properties that will benefit from these improvements.  These costs can be divided in a number of ways; front footage (width of the property), estimated anticipated benefit, or overall size of property.  However, the assessment will never be divided based on the value of the properties.

Mortgage lenders must be concerned with taxes since they could result in foreclosure and in the borrower’s loss of the property or in a decrease in the property’s value.

There are a number of non-governmental encumbrances that impact the mortgage lenders approval process and the property title.  Private parties may encumber real property.  Private encumbrances on real property can be voluntary or involuntary.  Examples of voluntary encumbrances include mortgages, restrictive covenants and conditions, easements and licenses.  Involuntary encumbrances include mechanics liens, prescriptive easements, and encroachments.

A mortgage on real property is an owners pledge to have his property held as security for payment of a debt or obligation.  When a property is encumbered by a mortgage, a voluntary lien is placed against the property.  If the lien is not satisfied, the property may be foreclosed upon, with the proceeds applied to the borrower’s debt.  Actually, a borrower does not get a mortgage from a mortgage lender when they buy a home; the borrower gives a mortgage to the mortgage lender using their home as collateral or security.

Covenants, conditions, and restrictions, as described with regard to determinable fee estates, are the limitations placed on real property by previous owners and can certainly affect value and, thereby, become a concern to the mortgage lender.

An easement grants a person or persons the right to use a portion of another owner’s land for a particular purpose.  An easement may exist in the subsurface, the surface or the air space above a property.  The easement only grants an interest in the land, never the rights of possession.

A mortgage lender would look individually at any easement which affects the property to be used as security.  Utility easements along property boundaries are fairly common and have little effect on the property’s use as security for a loan; however, if an easement ran through the center of the house and gave the utility company the right to tear down the house to get to its pipeline, it would be of major concern.

Involuntary encumbrances may include mechanics liens, encroachments and judgments.

A mechanic’s lien is a specific, involuntary lien that protects the interest of workers who have expended time, energy, and/or materials to improve a property.  The theory behind the mechanic’s lien is that the mechanic’s effort and/or materials have increased the value of the real property and, thus, he should be entitled to place a lien against the property to ensure payment. 

Mechanic’s liens also have a special feature.  If the mechanic begins suit within a specified period of time after completion of the work, the lien will be given priority based on the date work commenced, rather than the date the judgment was granted. 

This special feature allowing the date of the lien to relate back to the date work started makes it necessary for a mortgage lender to check to see if it appears any work has been completed recently to the property being used as security of the loan.  The appraiser is generally asked to take note of any work appearing to be recently completed; the borrower is also asked to sign a statement to this effect at closing of the home loan.

An encroachment is the illegal use or occupation of one owner’s real property onto another owner’s real property.  An encroachment typically occurs when a tree, fence, garage, or even a home crosses over the lot line onto a neighboring property.  Encroachments are not usually disclosed by a title search; instead they are discovered through physical inspection or a survey of the land.  The title to property that has been encroached upon may be unmarketable until the encroachment is removed and thus a mortgage lender is not likely to approve a home loan with a noted encroachment.

Encroachments are one of the important reasons that the mortgage lender will insist upon a survey including all the improvements currently on the property.

Judgments are a third category of involuntary encumbrances.  A creditor who wants to collect an unpaid debt can file suit asking the court to enter judgment creating a lien on the debtors’ property.  The creditor may then foreclose and force a sale of the property to satisfy the debt.