Unencumbered property refers to property that has been fully paid off, has no liens placed on it, and not subjected to any claims by creditors.
When a mortgage is fully paid off, the property is usually an unencumbered property unless some third parties have placed unique liens on it.
The owner now legally owns the house outright and no loans are secured against it.
Lenders love borrowers with unencumbered property firstly because it demonstrates the financial strength of the borrower.
You don’t get into a position where you have your mortgage fully paid off unless you have money in the bank.
This puts the borrower in good light.
Because of their conservative nature, partly validated for having paid off the house, they are usually risk-adverse individuals who wouldn’t go for maximum leverage.
As there are no existing liens on the property, the lender is presented with a good opportunity to “finance” the property with very little money.
Further more, should the borrower default and be dragged through the mud that is the foreclosure process, the lender will have the opportunity to snag the property on the cheap (amounting to the existing loan amount).
This acquisition could possibly be even cheaper for the lender if the borrower’s facility is a HELOC.