Every property has its own unique history, and not all of it is good. When buying a home, it is crucial to understand the property's background, particularly regarding ownership claims. This knowledge can help you avoid complicated legal issues in the future.
The abstract of title and chain of title provide valuable insights into a property's past. They reveal the history of ownership transfers, the current rightful owner, and any legal actions or claims related to the land. While title insurance has become the norm in recent years, certain real estate markets still rely on these documents.
Although your lender's title insurance generally covers any unexpected title defects, it is still wise to review the abstract of title before getting a mortgage on a new property. Knowing that the property has an unbroken chain of title can bring peace of mind during the often stressful closing process.
In this article, we will explore the significance of the chain of title and abstract of title in the homebuying journey. We will also discuss how you can ensure that your new house is in good standing.
Chain of Title Defined
The chain of title is essentially the history of a property's ownership as it passes from one person to another. It serves as a roadmap of how the property has changed hands over the years. Verifying an unbroken chain of title is crucial for securing financing for a new home and provides peace of mind during the closing process.
Conducting a chain of title search typically involves reviewing recorded documents such as deeds, property transfer paperwork, financial records, and legal documentation.
Why Do the Abstract of Title & Chain of Title Matter?
A clear title is essential when buying a home or commercial property. Dealing with liens, easements, ownership disputes, or other legal claims can be a nightmare for homeowners. Therefore, it is crucial to ensure that your new property will transfer to you without any issues.
Additionally, your mortgage lender will want to review the abstract of title and confirm the chain of title before proceeding with a loan. Holding the first lien position on a property is advantageous for a lender because, in the event of a foreclosure, they will be repaid first. Title defects, such as outstanding mortgages, liens, and encumbrances, often take precedence over a new mortgage during a foreclosure.
In summary, your lender may not approve a loan for a home with a broken chain of title.
How to Check the Chain of Title
Before closing a real estate purchase, a title search is necessary to verify that the title is clear and that the seller is legally authorized to transfer ownership. Your lender, specifically their attorney, will contract a third-party title company to conduct a property title search and check for any title defects.
During the title search, the abstract of title may be presented by the seller or obtained by the title company. This document provides a comprehensive overview of the property's ownership history.
A thorough title search may cover several decades or a shorter timeframe, depending on the lender's preference. Once the title company completes the search and confirms there are no title defects, the lender's attorney will issue a certificate of title, verifying the seller's ownership and their legal standing to transfer ownership.
Look Out for These Title Defects
While we hope for seamless property transfers and clear chain of title, the reality is that oversights can impact the legal status of real estate holdings. Here are some common title defects to be aware of:
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Liens and easements: Parties other than the seller may have ownership interests in the property, such as creditors who have placed liens on the property for unpaid debts. Easements grant certain individuals or organizations the right to access the property for specific purposes, possibly affecting any planned improvements or development.
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Clerical errors: Mistakes in legal paperwork, even seemingly minor ones, can disrupt the chain of title and require lengthy legal proceedings to rectify.
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Outstanding mortgages: Previous mortgages that were not fully repaid and were not properly documented during ownership transfers can complicate a title search and raise concerns for lenders.
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Legal restrictions: Title searches may reveal legal issues that restrict how the property can be used, often related to historical land purposes predating zoning laws.
What to Do If There Is a Problem with Your Title
Although issues with the chain of title may seem unlikely, they can happen. When a chain of title is broken, resolving the problem can involve a lengthy legal fight.
For example, a California couple inherited a home from family members but discovered that those relatives never legally owned the property, despite living there for decades. When they tried to sell the house, the title company blocked the sale due to the broken chain of title.
In such cases, title insurance can cover common and simple title defects. However, more complicated problems, like ownership disputes, require additional legal action that can be time-consuming. Buyers may choose to walk away from a sale rather than wait for the issues to be resolved, even if it means losing the earnest money deposit.
Sellers should promptly address any chain of title defects or discrepancies to protect their legal status as homeowners.
In Conclusion
Buying a property is a significant investment, and going into the transaction without proper knowledge can be risky. The abstract of title and chain of title provide valuable information about a property's history. Understanding this information helps buyers avoid legal issues during ownership transfers.
Furthermore, your mortgage lender will require an abstract of title to ensure a clear title before proceeding with your mortgage loan. A broken chain of title can delay or even cancel a sale altogether.
Remember to always do your due diligence and consult with your real estate agent to ensure everything is in order before closing on a house.
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