Having clear title to a property is a crucial part of any transaction between buyers and sellers. What does it mean to have clear title, and why is it important?
Definition of clear title
A clear title in real estate means that the owner has unrestricted ownership of a property. The property is not subject to encumbrances such as a mortgage, a lien or levy in favor of a creditor to whom the property owner owes money, or even a wayward fence. These encumbrances are known as clouds on title.
Why it is important in a real estate transaction
Clear title means that no other party has a claim against the real estate. Without clear title, a property owner will effectively be unable to sell the property. (Technically, the owner can transfer ownership, but if he doesn’t have clear title, the buyer will be unable to obtain a mortgage.)
When a buyer and seller enter into a sales contract on a property, a title company searches public records to determine what entities may have a legal claim against it. The title search could reveal one of the following.
A lien against the property as collateral is the most common type of cloud on title. The owner selling a house may have a mortgage, home equity line of credit (HELOC), or home improvement loan in which the property in question is security for the debt. Even if the original mortgage has been paid off, the owner may have secured a loan of some sort with his equity in the property. Unpaid contractors from the past may also file mechanics’ liens against a property.
Sellers typically pay off mortgages, HELOCs and home improvement loans with the proceeds of the property sale, clearing the lender’s lien. These encumbrances must be paid off before the buyer’s mortgage company will fund the loan he needs to buy the property. If the seller owes more than sales proceeds will cover, he must pay the difference out of pocket.
A levy is a financial assessment against the property made by either a taxing authority or a bank. It is placed on the property when the owner has unpaid tax or loan debt. The difference between a lien and a levy is that an entity with the power to levy can legally seize the property to sell it and pay the obligation.
Encroachments occur where an owner of property adjoining the seller’s property builds a fence or structure on the seller’s property. Encroachments also include situations such as where an easement has been granted that crosses the seller’s property, or a previous survey mapped out an incorrect property line.
Other title issues
Title problems can arise also in situations where a prior owner’s heirs still have some claim to the property. For example, a previous owner may have granted a part of the property to an heir, but the heir never filed the deed with the county clerk’s office and therefore the current owner is unaware of the heir’s claim.
When couples who jointly own a property separate but do not divorce, neither can sell the property without involving the other as a joint owner.
A property owned by a trust or other legal entity requires special attention by an attorney knowledgeable in title transfer.
Title insurance protects the parties to a real estate transaction against title issues. Title companies issue policies to buyers to insure them against any undiscovered or unresolved encumbrances that may be discovered. They issue policies to mortgage companies for the same reason, protecting the lender’s financial stake in the property.