What Is Chain Of Title And Why Is It Important?
Carey Chesney4-minute read
September 16, 2020
To put it simply, chain of title is the story of a home. It covers who built it and owned it first, who bought it after that, and who owned it each time it was sold all the way to the present day. This also applies to land without a home on it. In real estate terms, chain of title is often described as the sequence of historical transfers of title to a property.
Historically, real estate and land ownership have been carefully recorded and protected for a number of critical reasons. From a broad and collective perspective, chain of title is important to the wealth and productivity of nations, as it allows people to thrive and grow with the knowledge that the land they work and live on is truly theirs while they own it. Otherwise, it would essentially be the “wild west” in terms of who lives where and who owns what. Throughout history, ownership of land implied both aristocratic status and tax liability. It helps define the upward mobility of individual people and serves as the basis for their obligation to pay taxes that contribute to society as a whole.
Confusion over property rights can create tension between individuals and strain on the ability for nations and other more local municipalities to serve their citizens. For this reason, confusion over property rights needs to be avoided at all costs, which is the primary purpose of establishing a chain of title.
What Is Chain Of Title?
So, let's dig a little deeper into the specifics of what chain of title really is. As mentioned above, chain of title is the complete ownership history of the property and should always reflect continuous, unbroken ownership. There are other documents that prove current ownership, like a deed or a title, but it’s the chain of title that becomes important should your rights to own the property ever be called into question.
In real estate terms, a deed is the written document which transfers title (ownership) or an interest in property to another person. A title is a bundle of rights in a piece of property in which a party may own either a legal interest or equitable interest. “Bundle of rights” is the term for the set of legal privileges that is generally afforded to a real estate buyer and covers all the things they can and can't do with the property as its owner.
In terms of chain of title, all of these documents work together. For example, a mistake in the recording of the deed could lead to huge problems with the chain of title because in most cases the person who has a properly recorded deed will prevail over one who claims the property without one.
Where Do I Find My Home’s Chain Of Title?
When you purchase your home, a title search is prepared by a title company. As part of this process, the chain of title is researched to verify ownership, identify liens (a legal claim on assets which allows the holder to obtain access to property if debts are not paid – more on that later) and make sure judgments and taxes have been settled. The title company will also find any mortgages held on the property and do a survey to identify the physical boundaries, which is reported in the title. After gathering all that information, title companies create something called a title abstract, which is a condensed history of the title. If the abstract shows a clear title, the sale is good to go and you’re headed to the closing table!
What Do Liens Have To Do With Chain Of Title?
As most people know, when you buy a house using a mortgage, you don't really own it all by yourself. Essentially, you and the mortgage lender own the property together and then once you pay off the mortgage completely, it’s all yours!
Homes with mortgages are encumbered with a mortgage lien, which simply means that you can’t sell the property on which the mortgage is based unless you pay the mortgage out of the proceeds. It makes sense that you can’t sell a property that you don't fully own by yourself, right? This is called a voluntary lien, because you chose to have it applied when you took out the mortgage.
In addition to this type of lien on a property, there are also involuntary liens. These can include tax liens, if you’ve failed to pay property taxes, or judgment liens, if a court rules that you failed to pay a contractor for work done on your property. Homeowners associations may also be able to place a lien on your property, depending on their by-laws, for failure to pay dues. Liens follow the property, not the owner, so they must be paid before any sale can happen. Sometimes the buyer will agree to pay some or all of the liens against the property so the seller doesn't have to, but either way, someone has to pay them.
How Do I Know If My Chain Of Title Is OK?
The title company will do its best to make sure your title is clear before you close on a property, but things can always come up in the future. As with any investment, there is some element of risk. And like many other big investments – a car, a boat, etc. – insurance is available for your title as well. Claims against a property can arise at any time and making sure you have title insurance from your title company will protect you from financial loss due to missed or future claims. More specifically, title insurance, depending on the specific provisions of your policy, will protect you from court costs and any other financial loss caused by the claim. This doesn't mean it’s impossible for a claim to result in the loss of your home, but if you have title insurance, it’s very unlikely.
Summary: Listen To The Professionals
This was a lot of info to throw at you, but don't despair if you feel overwhelmed. Having a basic understanding of these concepts is great, but don't feel like you need to be an expert. After all, there are plenty of those already who are more than willing to help. If you have more questions, start by talking to a mortgage professional.
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