There are many different things that can cloud the title of a home. For instance, contractors can place a lien on a house for unpaid bills. Also, if a married couple bought a home together and later divorced, it may be unclear if they both still share title. If the owner is selling the property, the buyer’s mortgage lender will want the title cleared so that no one can can challenge the lender’s right to foreclose if the buyer defaults on the loan.
Title Search. By the time a buyer is ready to close, the closing agent or attorney will have contacted a title insurance firm about a title search. The firm goes through the county records for the seller’s house, which should include liens, past sales and transfers of title. If there are clouds, the company can try to research the matter further. If there are clouds that can’t be cleared away, that may sink the sale.
Problems. It is possible that any clouds that turn up are fairly easy to fix. For example, if a married couple bought the house but has since divorced and one of the spouses was never taken off the title, the seller will need their ex-spouse’s go-ahead before the sale. The ex-spouse can simply sign over the title to remove the cloud. If there are liens on the house, paying the creditors who levied the liens will remove them. Liens stay on the property even after it is sold, so it is unlikely anyone will buy it until the lien is gone.
Title Insurance. Title insurance policies protect the lender from loss if someone successfully takes title from the buyer. A buyer can also purchase an owner’s title insurance policy to provide the same protection as the lender. This may cover the buyer and lender if there is a cloud on the title that is not otherwise excluded or excepted from the Policy. If the title insurer finds a definite cloud, it may draft the policy to exclude that from coverage. Even if the buyer was willing to go ahead despite the cloud, excluding it from coverage may change the buyer’s mind.
Deeds. If a title cloud does turn up after the sale, it is possible the buyer can hold the seller liable for the problems. Most deeds used in home sales come with a guarantee. In California, for example, the document of choice is a grant deed. When a seller signs over the house using a grant deed, he or she is making an implied guarantee that the title is good. Even if the buyer is willing to close, a cloud on the title can come back to bite the seller.
Buyer Beware. Even though some house sales can close without clearing title, clouds, such as mortgage, construction and judgment liens can lead to foreclosures and lost money. Other title issues, such as a property line dispute, can create closing headaches if you decide to resell your property. Homebuyers should seek expert advice before agreeing to buy a house without first clearing its title.
Adapted from an article on homeguides.sfgate.com by Fraser Sherman.
This material is not intended to be relied upon as a statement of the law, and is not to be construed as legal, tax or investment advice. You are encouraged to consult your legal, tax or investment professional for specific advice. The material is meant for general illustration and/or informational purposes only. Although the information has been gathered from sources believed to be reliable, no representation is made as to its accuracy.
