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What is a cloud on title?

roof of a house
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roof of a house
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In any transaction involving a home, the title is an integral part of the process. The home title serves to verify who is the legal owner of the house. Although you may also be listed on the property deed, the title is what matters most in determining ownership, and your right to take action with the house, whether you want to sell down the road, borrow against it, or leave it to your heirs.

The title particularly comes into play when you buy a house. Before the deal can close, the current homeowner has to show that they legally own the home and have the right to sell it (or rent it). If the seller has unresolved title issues — specifically, what’s called a cloud on title — closing can get complicated; it might impede your ability to buy the home at all.

What is a cloud on title?

A cloud on title, also called a title defect, defective title or cloudy title, is anything that interferes with one person or entity transferring the title to another party. It means there’s an unresolved issue surrounding the property that casts doubt on the current owner’s ability to sell it. It can be a variety of things, from unpaid property taxes to an heir’s claim.

Generally, you discover an existing cloud on title during a title search, which is commonly done as a condition of a home sale. Essentially, the title search gives you a way to ensure there is no title defect so that when it is transferred to you, you have full, unencumbered ownership of the property.

Causes of clouds on title

The clouded title could be caused by anything that would call into question who owns the property. Most commonly, you will see a cloud on title because of delinquent or insufficient payments on a mortgage loan. In this case, the mortgage lender puts a lien on the property. The seller (or buyer, in some cases) would need to make arrangements to bring the loan current in order to get the mortgage lien released.

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Technically speaking, any outstanding mortgage is a lien, and gives the lender a claim to a property. But as long as payments are up-to-date, a mortgage doesn’t really cloud a title — and it doesn’t impede a home sale (since the assumption is the seller will clear the loan at closing).

Although a mortgage lien is a common cause, it’s not the only way a title may be clouded.

For example, the cloud might be caused by the current property owner owing money to someone else: an outstanding debt to a tax authority, a general contractor or another third party. When debts go unpaid, some entities have the option to put a lien on the property. This essentially forces the current owner to pay what they owe in order to sell the property — or to find a buyer willing to take on this financial burden to get the title released free and clear.

The second common cause of title clouds can arise from paperwork problems. If a married couple bought the property together and then divorced, the ex-spouse’s name may still be on the deed. That could leave the spouse still currently inhabiting the home without the full legal right to sell it. Regardless of how many solutions are available in your state to resolve this issue, it can still significantly complicate the selling process.

You can also run into title defects because of clerical issues. With an unreleased deed of trust, the appropriate land records authority hasn’t been notified that a mortgage loan has been paid in full. In other words, you might come across a cloud due to a mortgage lien simply because the proper paperwork hasn’t been filed to show that loan is no longer outstanding.

What are the types of clouds on title?

You might see a cloud on title because of:

  • A mortgage lien
  • A tax lien
  • Foreclosure proceedings at the property
  • Clerical issues, such as an unreleased deed of trust
  • Boundary issues, including encroachments and easements
  • Probate issues, if the property was passed down as an inheritance or as part of an estate
  • A mechanic’s lien, placed by contractor on the property because the homeowner was unable to pay for something involved in building or renovating the house (usually, construction materials or labor)
  • Fraud, which can occur if a falsified deed was recorded (e.g., putting the title in another person’s name)

How sellers can deal with a cloud on title

A title defect doesn’t have to mean the home sale falls through, but it does require action. Although available options may vary by state, the current title-holder typically has a few options:

  • Arrange for the lien to be lifted by paying off outstanding debt. If the cloud stems from a mortgage lien, mechanic’s lien or other unpaid debt, you can generally have the title cleared by paying off the debt and ensuring the proper paperwork is filed to clear the title defect. In some cases, as with a tax lien, the seller can clear the title by using some of sale proceeds to pay the outstanding tax bill. Depending on the buyer’s level of interest, paying off the outstanding debt(s) may be part of the sale negotiation.
  • Clear the lien or encumbrance. If the defect comes from a clerical issue like an unreleased deed of trust, filing the proper documents to clear up whatever’s causing the cloud may be the only resolution necessary.
  • Adjust the sales price. If the above steps aren’t options, the potential buyer may decide to cancel the sale. Purchasing a home with a cloud on title may make it difficult or impossible to get title insurance, and mortgage lenders usually do not offer financing for a cloudy titled property. As the seller, you may offer a lower price to incentivize a buyer to go through with the sale and assume responsibility for resolving the cloud on title issues themselves.

Ways for buyers to remove a cloud on title

If there is a cloud on the title of a property you’re considering buying and you want to clear it before purchasing, you have some options, although most will require action from the seller/current titleholder.

  • Lien payment: As a buyer, paying off the lien and filing the right paperwork to clear the lien is an option if you’re really motivated to purchase a property. As noted above, you may be able to negotiate a lower sale price to help cover your out-of-pocket financing to clear the title yourself. Many real estate investors and house flippers use this strategy to acquire properties from burdened homeowners.
  • Deeds of reconveyance: If the title has a lien but that debt has been paid, the lender/tax authority can generally execute a deed of reconveyance 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 continue.
  • Quitclaim deeds: Quitclaim deeds, which transfer the legal rights to a property, give you a way to clear the defect on a title (usually, relatively straightforward defects, like a misspelling or an unwanted easement). While this can clear the title, it also offers the lowest level of buyer protection of any type of deed.
  • Quiet title action: This is a petition you file in court that, if granted, makes the seller liable for all property liens while transferring the title to the homebuyer, giving them full, unencumbered rights to the property. Essentially, this “quiets” the cloud on the title. Depending on the circumstances, you may need to file a quiet title action in order to pay off any outstanding debts to clear the title.

Each of these steps requires additional work on the seller’s or buyer’s part and no matter what options are pursued, it may be best for either or both parties to seek legal counsel before proceeding.

To further protect yourself as a buyer, you may also want to consider title insurance. This can ensure that even if clouds on title defects pop up down the road, after your purchase is complete — and they could — you don’t face the financial obligation to rectify them.

Written by
Kacie Goff
Personal Finance Contributor
Kacie Goff is a personal finance and insurance writer with over seven years of experience covering personal and commercial coverage options. She writes for Bankrate, The Simple Dollar, NextAdvisor, Varo Money, Coverage, Best Credit Cards and more. She's covered a broad range of policy types — including less-talked-about coverages like wrap insurance and E&O — and she specializes in auto, homeowners and life insurance.
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Senior homeownership editor