In any transaction involving a home, the title is an integral part of the process. The title deed serves to verify who is the legal owner of the house. Although you can also be listed on the deed, the title is what matters most in determining ownership and your right to act with the home, whether you want to sell later, borrow against it, or leave it to rest. your heirs. .
The title comes into play in particular when buying a house. Before the transaction can be concluded, the current owner must prove that he legally owns the house and has the right to sell (or rent) it. If the seller has unresolved title issues – specifically, what is known as a title cloud – the closing can get messy; it could hamper your ability to buy the house.
What is a title cloud?
A title cloud, also known as a title defect, defective title, or cloudy title, is anything that interferes with a person or entity transferring title to another party. This means there is an unresolved issue with the property that casts doubt on the current owner’s ability to sell it. It can be anything from unpaid property taxes to claiming an heir.
Typically, you discover an existing title cloud during a title search, which is usually done as a condition of a home sale. Essentially, the title search gives you a way to make sure there are no defects in title so that when it passes to you, you have full, unencumbered ownership of the property.
Causes of Headline Clouds
The scrambled title could be caused by anything that would question the ownership of the property. More often than not, you’ll see a cloud on the title due to overdue or underpayments on a mortgage. In this case, the mortgage lender puts a lien on the property. The seller (or buyer, in some cases) will need to arrange to update the loan in order to obtain release of the mortgage lien.
Discount rate overview
Technically speaking, any outstanding mortgage is a lien and gives the lender an interest in a property. But as long as payments are up to date, a mortgage doesn’t really obscure a title — or prevent a home from being sold (since the assumption is that the seller will repay the loan at closing).
Although a mortgage lien is a common cause, it is not the only way a title can be obscured.
For example, the cloud can be caused by the current owner owing money to someone else: an unpaid debt to a tax authority, general contractor, or other third party. When debts are not paid, some entities have the ability to put a lien on the property. This essentially forces the current owner to pay what they owe to sell the property – or find a buyer willing to shoulder that financial burden to get the title released freely and clearly.
The second common cause of title clouds can stem from paperwork issues. If a married couple bought the property together and then divorced, the ex-spouse’s name may still be on the deed. This could leave the spouse who still currently lives in the house without the full legal right to sell it. No matter how many solutions are available in your state to solve this problem, it can still significantly complicate the sales process.
You may also experience title flaws due to writing issues. With an unpublished trust deed, the proper land registration authority has not been notified that a mortgage has been paid off in full. In other words, you could experience a mortgage lien cloud simply because the proper paperwork has not been filed to show that the loan is no longer outstanding.
What are the types of clouds on the title?
You may see a cloud on the title due to:
- A mortgage lien
- A tax privilege
- Property Foreclosure Proceedings
- Administrative issues, such as an unpublished trust deed
- Boundary issues, including encroachments and easements
- Probate issues, if the property was inherited or passed on as part of an estate
- A mechanic’s lien, placed by the contractor on the property because the owner was unable to pay for something involved in building or renovating the home (usually building materials or labor -work)
- Fraud, which can occur if a forged deed has been recorded (for example, putting the title in another person’s name)
How sellers can manage a cloud over the title
A title defect does not necessarily mean that the sale of the house fails, but it does require action. Although the available options may vary by state, the current title holder generally has a few options:
- Arrange for the lien to be lifted by repaying the unpaid debt. If the cloud is from a mortgage lien, mechanic’s lien, or other unpaid debt, you can usually clear the title by paying off the debt and ensuring the proper paperwork is filed to clear the default. title. In some cases, such as with a tax lien, the seller can clear the title by using a portion of the sale proceeds to pay the unpaid tax bill. Depending on the buyer’s level of interest, repayment of the outstanding debt(s) may be part of the sale negotiation.
- Erase the lien or charge. If the default stems from a clerical issue such as an unpublished trust deed, filing the appropriate documents to clarify what is causing the cloud may be the only remedy needed.
- Adjust the selling price. If the above steps are not options, the potential buyer may decide to cancel the sale. Buying a home with a cloudy title can make it difficult, if not impossible, to obtain title insurance, and mortgage lenders generally do not offer financing for a cloudy titled property. As a seller, you can offer a lower price to entice a buyer to close the sale and take responsibility for resolving the cloud issue on title issues themselves.
Ways for buyers to remove a cloud on the title
If there is a cloud on the title of a property you are considering buying and you wish to clear it before buying, you have a few options, although most require action from the seller/ current holder.
- Lien payment: As a buyer, repaying the lien and filing the correct paperwork to clear the lien is an option if you are truly motivated to purchase a property. As noted above, you may be able to negotiate a lower sale price to help cover your personal financing to clear the title yourself. Many real estate investors and home buyers use this strategy to acquire properties from overwhelmed owners.
- Deeds of retrocession: If the title has a lien but the debt has been paid, the lender/tax authority can usually execute a retrocession deed to show that the debt has been paid. If the seller is unable (or unwilling) to act on this option, you may be able to facilitate the process instead to ensure the sale can proceed.
- Waivers: Quitclaims, which transfer legal rights to a property, allow you to eliminate the defect on a title (usually relatively simple defects, such as a misspelling or an unwanted easement). While this may clear the title, it also offers the lowest level of buyer protection of any type of deed.
- Silent title action: This is a petition you file in court which, if granted, makes the seller responsible for all liens on the property while transferring title to the buyer, giving them full and unencumbered rights to the property. . Essentially, this “calms down” the cloud on the title. Depending on the circumstances, you may need to file a discreet title action to pay off any outstanding debt to clear the title.
Each of these steps requires additional work on the part of either the seller or the buyer and, regardless of the options chosen, it may be best for either or both parties to consult a lawyer before proceeding. to chase.
To further protect you as a buyer, you can also consider title insurance. This can ensure that even if clouds of title defects appear down the road, once your purchase is complete – and they might – you don’t have a financial obligation to rectify them.