When you buy real estate, you want to know the property is yours. That ownership is referred to as holding the title, and when someone sells you the property, the title transfers to you as the new owner.
When a seller’s ownership is undisputed, the title is clear. However, legal issues like an unpaid mortgage or a probate dispute can lead to a cloud on title or a defective title.
In the same way that a rainy day can ruin a picnic, a cloud on title can ruin a real estate transaction.
Defective titles can delay and disrupt a property sale, creating headaches for buyers and sellers. However, a cloud on title may not be permanent, and it’s possible to sell or buy a home once the cloud is cleared.
Cloud on Title, Explained
A cloud on title is typically caused by a legal issue that affects the ownership of a property and may prevent a seller from transferring full ownership.
A cloud on title stays with the property, so selling or transferring the real estate won’t resolve the problem. Buyers will usually hesitate to purchase a property with a clouded title, and lenders usually won’t finance such a transaction.
Examples of Clouds on Title
A cloud on title can take many forms, but the two most common are an encumbrance on title and a defective title.
- Encumbrance on title: Someone other than the owner claims a legal interest in the property.
- Defective title: A current (or past) ownership issue that makes the chain of title (the legal record of ownership) unclear.
Encumbrance on title
An encumbrance on title is any legal claim by a third party that has an interest in your property.
Your mortgage is technically an encumbrance on title because your mortgage lender is entitled to compensation when you sell your property. But a mortgage agreement usually won’t prevent you from selling a home or cloud your title unless you’re behind on payments.
A lien is a more common type of cloud on title. A lien is a legal claim that uses a property as collateral for a debt.
Liens appear on the property record and tell anyone, including potential buyers, that the homeowner owes money.
Late or missed mortgage payments can result in a mortgage lien and foreclosure. To remove the lien, you’ll need to pay your debt or make other arrangements with your mortgage lender.
Unpaid property taxes or income taxes can result in a tax lien. Liens can be filed by government bodies ranging from your local township to the IRS.
Homeowners associations also place liens on properties that haven’t paid dues or that violate HOA rules.
If you can’t pay a contractor or other worker for work done on your property, a worker can place a contractor’s lien or mechanic’s lien on the property. An unpaid subcontractor can file a lien even if the homeowner paid the general contractor.
Judgment liens may be attached to a property if the property owner loses a lawsuit. Judgment liens help ensure that the liable party will pay the judgment as ordered. Many types of lawsuits can lead to judgment liens – the case doesn’t have to be property-related.
A lis pendens is a legal action claiming a right to a property before litigation begins. It works like a preemptive lien that may or may not be related to the property.
An easement is a legal agreement that gives a person or entity (like a utility company) legal permission to access or use someone else’s property for a specific purpose. A properly recorded easement doesn’t usually cloud a title. However, an easement that’s vague or disputed could cause issues.
Even if someone isn’t taking legal action against you, other circumstances can cause a cloud on title.
A property owner must have the authority to transfer the property, and the transfer should be recorded in county property records. If the ownership of a property is in dispute or the property was improperly transferred at any point, it can create a cloud on title.
For example, say a property owner dies and leaves behind two adult children. If the children disagree about who should inherit the property or what to do with it, this disagreement can create a cloud on title until the issue is resolved.
Another common ownership dispute scenario is divorce. If there is a disagreement about the ownership of the home, it can also cause a defective title because one spouse may not have the legal authority to transfer marital property.
Simple clerical errors in a deed can sometimes lead to discrepancies in the historical record of a property or its chain of title. This can happen if a name is misspelled, the property’s address is recorded incorrectly or if there have been past cases of fraud, forgery or illegal transfers.
These problems can often be fixed, but the cloud on title will need to be addressed.
Consequences of a Cloud on Title
Clouded titles make it difficult to sell a home and can create major problems for a home buyer if they aren’t discovered before closing.
A cloud on title can decrease the home’s value and make it difficult to sell. Many buyers won’t purchase a property with a clouded title. You may have to delay a sale while you’re paying off liens or other legal costs to resolve the problem with your title.
Buyers need to be cautious of a cloud on title. A clouded title can make it difficult to get financing for the purchase or delay the sale.
Title problems that aren’t discovered until after closing can be even more troublesome. As the new homeowner, you may end up paying a lot of money to resolve the clouded title, and major problems can arise if the seller didn’t have the right to transfer the property. In extreme cases, you could even be forced to give up the property.
How To Remove a Cloud on a Title
Defective titles are a headache, but they don’t have to derail a real estate transaction. There are ways to remove a cloud on title. Just make sure the method you choose is based on advice from a real estate attorney or another appropriate legal professional.
Pay debts to resolve liens
There may be different reasons why a seller couldn’t pay a debt. In some cases, it may have been a simple clerical error. In other cases, it may have been due to a lack of funds or because there was a legal issue to resolve.
Whatever the reason for the lien, it’s best to either pay off the debt or talk to a creditor to come up with a solution.
Sometimes clearing up a cloud on title may be as simple as getting someone to sign a quitclaim deed, which is a legal document that allows someone with a claim of ownership to a property to “quit” or give away their claim.
Quitclaims aren’t typically used to settle legitimate claims of ownership, but they can help correct clerical errors, like a misspelled name on a deed or removing an easement that is acting as a cloud on title.
Request an action to quiet title
This is a legal request to a judge to settle a dispute related to a property. Quiet title actions are usually used if there was a forgery in the past, an ambiguous quitclaim deed or a dispute over an easement.
How To Avoid Clouds on Title
Once you own a piece of real estate, you’ll want to avoid clouds on title. Preventing problems with the title is generally easier than resolving the issue later.
Protecting property you own
You can avoid most liens and encumbrances by keeping up with your mortgage payments, property taxes and HOA fees. Also, when handling transfers or granting an easement, ensure that the paperwork is detailed and accurate. Consider working with a lawyer on any complex issues.
If you hire a contractor to work on your home, make sure you understand the contract terms. If you work with a general contractor who uses subcontractors, make sure you know how the subcontractors will be paid and take steps to protect yourself. For example, instead of paying the contractor upfront, you can pay for the work in stages and write checks to both the contractor and their subcontractor(s).
Avoid purchasing a property with a clouded title
A title search can help you avoid purchasing land with a clouded title. A title company performs a search to ensure that the seller has the right to transfer the property. A title search involves researching many sources, including county property records, deeds and court records.
Title companies also provide mortgage title insurance, which can protect an owner and help with legal fees if a cloud on title is discovered later on. Lenders require a title search as part of the mortgage origination process.
Take Care of Business and Prevent a Rainy Day
A cloud on title can dump unexpected legal fees and other expenses in your lap. Resolving title issues quickly ensures that your property can be sold quickly and with little to no hiccups.
If you’re purchasing property, make sure to get a title search and resolve any title defects before completing the transaction.