Clouds, Claims And Defects: The Many Names For The Title Problems That Can Delay Your Closing
If you’re preparing to make an offer on a home, it can be an unpleasant surprise to learn there’s a problem with the title. A cloud on title refers to title defects that are uncovered during a title search.
In the best-case scenario, a cloud on title is a minor inconvenience that can slightly delay your closing. In the worst-case scenario, you could lose out on the home altogether. Understanding the different types of problems that can hinder your home sale will help you decide how to proceed.
What Is A Cloud On Title, Or Title Defect?
A cloud on title is a phrase used, primarily by lawyers, to refer collectively to any of the types of title defects that a title search can uncover. These include any encumbrances that could interfere with a clean transfer of title from seller to buyer.
A cloud on title in real estate includes the following types of issues:
- Court proceedings
- Past claims on the title
It’s important to spot these issues as soon as possible because many of them can negatively impact the property. If you’re attempting to sell the home, a cloud on title can devalue your property and make it more difficult to sell. And if you’re the buyer, an unresolved title defect could force you out of the transaction.
What Is A Title To Property?
When you own the title to a property, you have the legal right to decide what to do with it. The title gives you the right to live in the property, as well as the right to sell it eventually.
When you buy a new home, the title is transferred to you from the seller. So, after you close on a house, you’ll have ownership of the title and the deed.
However, property rights can be limited in a number of ways, like zoning laws or easements. That’s why all home buyers are required to do a title search before they close on the home.
Can I Waive A Title Search?
Before you close on a house, a title search is performed to uncover any issues with the property. For instance, if there are easements or any unresolved payments, these problems will come out during a title search. A title company or attorney will perform the search.
But you may be wondering if the title search is really necessary and if there’s a way you can waive it. And that depends on whether you’re buying the home through a lender or paying in cash.
If You’re Applying For A Mortgage
If you’re buying a house through a mortgage lender, your lender will always require a title search. By skipping a title search, you run the risk that the seller isn’t truly the rightful owner of the property. This could jeopardize your property ownership in the future, and lenders are never willing to run that risk.
If You’re Paying In Cash
If you’re paying in cash and the seller agrees, it is possible to waive a title search. However, you should never consider waiving a title search. By forgoing the title search, you run the risk of taking a complete loss if the property you thought you were buying wasn’t the seller's to sell.
What Kinds Of Problems Constitute Clouds, Or Defects?
Liens are the most common types of title problems that emerge from title searches. A lien follows the property, not the debtor, so if you purchase a home with a lien on it, you become responsible for that debt as soon as the title is transferred to you.
If the initial title search reveals an issue, the title company will have to do some further digging. This could force your lender to delay closing on the home.
A tax lien happens when a homeowner fails to pay their taxes and the government puts a lien on their property. The home serves as collateral for the debt, and if the tax bill isn’t paid, the government can seize the property. If a tax lien shows up during a title search, the title company will do some further investigating to find out if the debt is still outstanding.
If The Seller Has Or Will Pay The Delinquent Tax Bill
In most cases, if a tax lien shows up on a property, it’s because the bill was paid, but the lien was never removed. If this is the case, the seller can clear the lien by offering proof of payment. But even if that tax bill hasn’t been paid, the seller can remove the lien from the sales proceeds of the home.
If The Seller Can’t Or Won’t Pay
If the seller is unwilling or unable to pay the tax lien, you may have other options available to you. If your sales contract includes a title contingency, you have the option to walk away from the sale with your earnest money.
But if you still want to purchase the home, you can pay the tax bill and clear the lien yourself. However, if there’s no title contingency and you choose to walk away from the home, you will lose your earnest money.
Any easements on a property should be known to potential buyers early in the sales process through the seller’s disclosure forms. An easement means that the seller owns the title, but another individual or organization has a right to use the property. Easements exist on most properties, but some can place serious restrictions on what you can or cannot do with your property.
A mechanic’s lien is typically filed by a contractor or supplier that never received payment for the work they did on a property. By placing a mechanic’s lien on the property, the seller cannot sell the home until the lien is paid.
When a mechanic’s lien shows up on a property, in many cases, that underlying debt may have already been paid. However, don’t assume that you can ignore an old Notice of Intent. In most states, mechanic’s lien laws heavily favor the unpaid worker, and the claim will follow the property.
An old unpaid mortgage can cause problems in a title search. However, if the seller holds title insurance from when they bought the property, it might cover the costs of a previously undiscovered lien.
Unpaid HOA fees
The homeowners association can place a lien on properties if an owner fails to pay their HOA fees. And if the seller fails to pay their fees but sells the property before the lien is in place, the subsequent owners will become responsible for the unpaid balance.
When you’re in the process of buying a home, there may be a lapse between when you sign the real estate contract and when the actual closing takes place. What happens if the seller passes away during that time?
This really depends on the circumstances and who has the title after the seller dies. Let’s look at a few different ways this could play out.
If The Seller Had A Spouse Or Other Joint Tenant
If the seller had a spouse or other joint tenant with rights of survivorship, this means the property rights are transferred to that individual after death. The sale can proceed forward without any delays.
If The Seller Died With A Will
If a property is subject to probate, then you’ll have to wait until the will is probated before completing the purchase of the property. The good news is that the sale is treated as a binding contract if the seller accepted your offer on the property before they died. That means your contractual rights will prevail over any claim by the estate’s heirs, but there could be a lengthy delay.
If The Seller Owned The Property Through A Living Trust
If the seller owned the property through a living trust and hadn’t yet removed it from the trust in preparation for the sale, the property will pass to the trust’s beneficiaries. And unless the new owners wish to proceed with the sale, the buyers will have to walk away empty-handed.
If a title search uncovers that the property is subject to any kind of legal proceeding, the sale will usually be off. In theory, the buyers could pay in cash and proceed with the sale. But they would be unable to record the title unless the legal proceeding worked out exactly as they hoped. And this is a risky gamble that isn’t worth undertaking.
Claims On Title
The chain of title refers to the history of a property’s ownership. It’s what allows title companies to clearly trace the property right from one owner to the next. But during a title search, claims can arise from parties who believe their ownership rights were wrongfully denied for a variety of reasons.
If the seller is divorced and the deed still includes the spouse’s name, a quitclaim deed will need to be filed to remove the spouse’s name and clear the cloud.
What Should I Do If The Title Search Reveals A Title Defect?
In most cases, if a red flag emerges from a title search, the problem will be minor, and the closing only slightly delayed. However, you should never ignore a title defect unless you’re willing to cover the debt yourself.
If you become aware of any problems after a title search, it’s a good idea to speak to a real estate attorney. They will be in the best position to advise you on how to proceed in your current situation, given the laws in your state.
The Bottom Line: Clouds On Title Will Dissipate Once The Title Defects Are Resolved
Before you can close on your new home, a title search will be performed on the property. Any title problems must be taken seriously and resolved before closing. But fortunately, most problems can be taken care of quickly and with only a slight delay.
If more serious problems arise, it’s usually better to wait or walk away from the home than to proceed. And if you’re taking out a mortgage to buy the house, it’s unlikely your lender will let you purchase the home anyway.
Learn more about how long closing can take and other common mortgage questions in our Learning Center.