If you’re about to buy a home, how do you know the seller owns it? (This is not a trick question.) Without a clear title — one free from liens — your lender won’t lend, your insurer won’t insure, and there won’t be a sale. Worse, if somehow there is a sale and the title is found to be defective, you can actually lose the property.
What is a clear title?
Clear title definition
A clear title, also known as a “clean title,” is a property title that is free from liens or additional issues that could jeopardize ownership, such as boundary disputes (encroachments) or easements. With a clear title, there’s no doubt who the owner of the property is, or who can claim legal ownership of the property.
To get a mortgage, lenders require a thorough search through local property records to ensure the title is clear.
How to check for a clear title on a property
As a homebuyer or seller, you can visit your local property records office or do an online search for the property’s title history. This will tell you what’s in the official records, but it won’t tell you what isn’t there — and there may be other records that’ll need to be checked, as well, such as building permits and zoning rules, which can limit property rights.
When getting a mortgage, your lender will work with a closing agent, such as an attorney, title company or escrow agency, to conduct a title search. Often, borrowers are asked to pay a fee for this search as part of the loan’s closing costs.
Issues with the title and how to resolve them
Given that property ownership is documented in local records offices, it might seem as though there should be few, if any, title defects. What can be wrong with a property title? First American Title Insurance Company, one of the largest in the U.S., has a list of some 70 possible defects, including:
- A forged deed
- An undisclosed divorce
- Undisclosed tax liens
- A disputed will
- Mechanic’s liens
- Zoning violations
While they’re not common, if the title search uncovers an issue (or if it doesn’t, but one comes up later), there can be considerable legal costs. This is where title insurance comes in.
Your lender will require the purchase of lender’s title insurance, which protects the lender and covers up to the value of the mortgage if a defect is found. You may also be required to purchase owner’s title insurance to protect yourself, which covers up to the home’s purchase price.
With an owner’s title insurance policy, the title insurance company will pay any outstanding loan balance as well as your equity up to the purchase price in the event of a successful claim of ownership by another party. You can also get an inflation rider so that if the value of the property increases, so does the amount of coverage (up to a certain point).
Keep in mind that the cost of title insurance can vary considerably. In some areas, title insurance costs are set by state regulators, while elsewhere it can pay to shop around. When comparing your options, always ask for the “reissue rate,” which is a discounted rate that may be available in situations when the property was recently sold or refinanced.
Remember, too, that while title insurance policies cover a lot of potential issues, they don’t cover all of them. If an issue does come up, it’s best to speak with an attorney who specializes in real estate matters to resolve any questions before you buy.
Featured image by monkeybusinessimages of Getty Images.