Free and Clear

What Does Free and Clear Mean?

Free and clear is a slang phrase describing the situation of someone when they gain outright ownership of an asset: that is, it is completely paid off and no creditor has a claim on it. It most frequently applies to real property.

Understanding Free and Clear

The phrase "free and clear" is often used when speaking of real estate. It can be reference to one's mortgage. If a homeowner's mortgage is completely paid off, and the debt is retired, then the homeowner is said to own the residence "free and clear."

In the case of a home or building that's up for sale, before the deal can close, the property must be "free and clear" so the buyers know that there are no prior claims on it, such as liens (which represent a monetary claim, usually arising from a lawsuit) or other encumbrances. A title search company can be hired to assist prospective owners to ensure that a property has a clear title before proceeding with a transaction. If the owner does not hold a clear title, there may be clauses in their mortgage that accelerate payment to force the debt to be cleared before the property can be sold.

Since it's synonymous with being out of debt, free and clear is usually seen as a positive thing. However, there are a handful of tradeoffs in owning a property free and clear. For example, there may be certain mortgage-based tax breaks that will no longer be available to the owner. Though they may have free and clear claim to the property, it is still possible that it might be seized if eminent domain were to be successfully enacted by government entities.

How Free and Clear Factors into Financing

If a homeowner holds their property free and clear, they could make seller financing an option to potential buyers in order to complete the deal. Under such an agreement, the buyer would pay an agreed-upon down payment followed by regular payments to the current owner.

Buyers of property who have the capital available might choose to pay cash to purchase real estate rather than take out a mortgage. That would grant them free and clear ownership of the property and most likely clear title to the real estate.

Once real estate is paid off and held free and clear, it is still possible for the owner to take out a new mortgage against the equity they have built up in their home, and then use that financing for other purposes. This would put the owner into debt again and remove the free and clear standing of the property.

Special Considerations

The term free and clear may sometimes be used to describe a type of incremental loan facility. A free and clear term loan or debt basket also called a freebie basket, which could be used by companies to take on more debt over time without having to face certain restrictions such as debt incurrence tests.