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When you buy a home, you need a way to prove it’s yours. Enter: the title. This is the legal document that shows you own the property.
A new title doesn’t get created when you buy a house. Instead, the home’s existing title gets transferred from the seller to you. And they got that title transferred to them from the previous homeowner, and so on and so forth. At least, that’s how it’s supposed to work.
Issues can arise during that title transfer process, though. That’s precisely what a chain of title is supposed to track.
What is a chain of title in real estate?
In real estate — as with other types of personal property, like vehicles — the chain of title is the list of all of the historical legal owners, from the first owner to the current one. As Marcus Ginnaty, spokesperson at First American Financial Corporation, explains, “A chain of title is the record of everyone that has held title to, or owned, a home or other specific property over time. Each change in ownership from one owner to the next is a separate link in the chain, from the past up to the present day.”
If you’re buying a home, it’s important for the chain of title to flow through to you, establishing you as the rightful undisputed owner of the property.
The importance of a chain of title
A clear chain of title means that once the seller transfers the title to you, you own the property. This matters for two reasons. First, it ensures that you can live in your new house and make improvements there without any worries. Since you’re the legal owner, it’s your land and abode.
Secondly, chain of title matters when you sell. To legally transfer the title to the next owner, you need to be the current one. A clouded title because of chain of title issues could prevent you from completing the sale.
How a chain of title is established
The chain of title develops through the years. Each time the title gets transferred to a new owner, the chain grows. To add a new “link” in the chain, specific documents generally need to be filed with the appropriate county or local records office.
From a potential homebuyer’s perspective, though, the chain of title is established through a title search. You generally hire a title company for this fairly complicated process that requires digging into records at multiple public offices. The title company then presents you with what’s called a title abstract, which should include any information you need to know about the chain of title.
Common chain of title FAQs
Because chain of title can be a complex issue, it can be helpful to know some key details, like the following.
You could start exploring the title by visiting your county’s property records office. That said, Ginnaty advises that this is best left to the professionals. “Establishing a chain of title often requires considerable expertise. The steps required also vary tremendously by jurisdiction. The title professional may need to search several different public offices, look through multiple filing systems — each with its own “index” — and compile many different types of records into a coherent narrative of the property’s legal history while flagging any potential problems along the way,” he explains.
Fortunately, a title professional can do this for you. They might be called a title agent, abstractor, or attorney. Ultimately, when you hire a title company, they will know how to establish the chain of title.
A lien gives a creditor a legal right involving your property. When you take out a mortgage, for example, the mortgage lender usually places a lien on the property. The lien stipulates that you can’t sell the house until you repay that mortgage debt.
As Ginnaty says, “Liens are a common title issue that impact a homeowner’s right to use their property. Prior owners of a property may not have been meticulous bookkeepers — or bill payers. And even though a previous owner’s former debt is not your own, banks or other financing companies can place liens on your property for unpaid debts, even after you have closed on the sale. This is an especially worrisome issue with distressed properties.”
In short, when establishing chain of title, the title company might uncover a lien on the property. If you buy the house with that lien in place, it becomes your financial responsibility. In fact, one of the main reasons you should care about chain of title is its ability to uncover outstanding liens.
“Establishing a chain of title is how you prove who owns a piece of property. It’s also how you discover relatively minor defects that consumers expect to be resolved before they buy their homes. However, some defects simply cannot be discovered with 100 percent certainty,” Ginnaty says. “The job of title professionals is to discover issues in the chain of title. The job of title insurance is to reduce the risks of uncertainty inherent in any chain of title.”
In some cases, the cloud on the title comes from an administrative oversight, like a misspelled name or improper paperwork filing. You can generally correct these issues fairly easily.
If the gap in the chain of title stems from something major, though, consult with your real estate agent and the title company. The last thing you want is to buy a home only to find out your legal ownership comes with unexpected financial burdens or major question marks.
If the chain of title problem arises during the title search, you have options. “Sometimes, title professionals might need to track down prior people in the chain of title to get their help to clear things up,” Ginnaty says. “Other clouds, such as judgments or liens, are routinely required to be paid off. In some instances, a judge might even need to sort out complicated title problems in a ‘quiet title suit.’” Similarly, if it’s a minor issue, a quitclaim deed might solve the problem.
When the chain of title issue is a major one, though, you may want to walk away from the property lest you get embroiled in an expensive headache.
For title issues that crop up after the sale closes, you can get protection. Specifically, buying title insurance steps in if you face title problems down the road. “After the title search is complete,” Ginnaty says, “the title company can provide a title insurance policy, which protects the insured against covered title defects, like a previous owner’s debt, liens and other claims of ownership that may have been instituted prior to purchasing your home. This makes a title insurance policy a valuable investment towards protecting an even greater investment — your home.”