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What Is A Certificate Of Title In Real Estate?

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Published on May 24, 2022
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When you’re buying a home, you hear a lot of terms you might not be familiar with. Certificate of title in real estate is a term worth knowing since it defines the ownership of the property you’re buying.

This article will outline what you should know about a certificate of title and how to avoid ownership issues that could end up costing you more than you bargained for.

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What Is A Certificate Of Title?

A certificate of title is a legal document issued by a government agency that indicates proof of ownership of real property or titled personal property, like a car or a boat. Once ownership is transferred at closing, the certificate of title is proof of property ownership. It lays out any liens, easements and other claims against the title.

The document includes information such as:

  • The name of the owners or title holder
  • Description of the home or property
  • Lienholder’s information (if any)

Upon the sale of the property, the certificate of title will transfer to the buyer, as long as there are no hiccups along the way. However, if the certificate of title is “dirty,” meaning it has liens or easements, further research will have to be done to see how this impacts the purchase of the home.

When buying real estate, make sure the seller has a clear title to sell to the buyer. Certificates of title with liens or levies from creditors may present an issue.

For example, let’s say the owner of a property you’re interested in has outstanding mortgage payments or owes contractors for work they did on the home. Since the title is not clear, the new owner would be responsible for resolving these liens, which, after buying a new home, is the last thing you want to deal with.

Purchasing a home with a free and clear title ensures you’ll have complete ownership and third parties won’t pose questions of ownership in the future.

Why Is A Certificate Of Title Important?

At closing, the certificate of title acts as proof that the seller has a clean title to the property to transfer to the buyer. Any limits on title, such as an encumbrance like a lien or an easement, will be listed on the certificate.

Again, if there is a lien on the property, you will become responsible for the title limitations. So, if you accept the transfer of real estate, the liens follow the property, not the previous owner.

Additionally, if you’re financing the home with a mortgage, your lender usually requires the certificate of title before they will let you borrow funds.

Title Vs. Certificate Of Title: What’s The Difference?

A title is an abstract legal concept referring to rights and privileges of property ownership, while a certificate of title is a legal document. A certificate of title is strong proof that the holder owns the property. A lien by tax authority or homeowners association seeking fees will – even if it predates the transfer of ownership – place a cloud on the buyer’s title despite the previously issued certificate.

Deed Vs. Certificate Of Title: What’s The Difference?

It’s easy to confuse a deed and a certificate of title because both provide ownership proof of a property. The certificate of title includes information that strictly identified ownership and any liens or encumbrances on the property, like tax liens. Whereas a deed often provides more extensive information about the property as well as conditions of ownership.

For example, the deed will often include data about the transfer of the property, such as the purchase price of the home and any property use restrictions. However, with today’s home sales, this information will be on the contract of sale, which the deed will reference.

While both offer proof of title, a certificate of title is issued by a government agency, while a deed is a different legal document that gets filed with a municipality. The mortgage, another legal document, is attached to the deed to create a mortgage lien.

What Does A Title Search Look For?

Title search companies closely review public records to make sure all previous liens on the property have been resolved and that the seller owns a clear interest in the property. Public records are essential to the assessment of ownership since they provide legal and public proof of the current owner’s interest in the property.

During the title search, the title company will look for things like:

  • Overdue taxes
  • Existing liens
  • Unpaid homeowners association dues
  • Judgements on unpaid taxes
  • Easements
  • Leases
  • Other restrictions, such as age requirements for the community

The title company may also order a survey or drawing of the home, which can identify encroachments or easements – for example, if the neighbor built their fence within the boundaries of the property. If the title company finds an issue, it’s their job to consider this issue and insure it.

Together with the seller’s warranty deed, the buyer is protected from all knowable claims against the title.

If A Certificate Of Title Is Proof Of Ownership, Why Do I Need Title Insurance?

Although a certificate of title offers information about the ownership of the property and outstanding debts, it doesn’t guarantee that there are no issues with the property. Since not every encumbrance is listed publicly, some owners may not provide adequate information on the property’s outstanding debts. That’s why title insurance is a necessity.

Title insurance is a layer of protection against title claims. Buyers would have legal recourse against the previous owner if a new claim arose or against the title search company if they failed to find a defect, but having insurance means that homeowners need only file a claim. Having title insurance protects against claims that were unknown at the time of the title search and claims by heirs of previous property owners.

If there are defects on the title, all parties involved in the transaction might be at risk without title insurance. As the buyer, you could bear the burden of any tax liens or other outstanding balances the previous homeowner left with the property.

This means, if the debt continues to go unpaid, you could risk losing your home. Having title insurance protects you against risks like this. 

The Bottom Line: A Certificate Of Title Shows What You Own At The Time Of Purchase

Property ownership relies on the transfer of clean title from sellers to buyers. The role of certificate of title in real estate is to prove that the seller is the rightful owner of the property and there are no outstanding liens or other debts. A clear title ensures that the new buyers can purchase the home outright without worrying about potential financial issues popping up in the future.

If you’re ready to take the first steps toward property ownership, getting a mortgage preapproval is a great first step. Apply online today to get preapproved for a mortgage loan.

 

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Ashley Kilroy

Ashley Kilroy is an experienced financial writer. In addition to being a contributing writer at Rocket Homes, she writes for solo entrepreneurs as well as for Fortune 500 companies. Ashley is a finance graduate of the University of Cincinnati. When she isn’t helping people understand their finances, you may find Ashley cage diving with great whites or on safari in South Africa.