What Is Chain Of Title And Why Is It Important?

Every property has a unique history marked by potentially multiple owners and real estate transactions that affect the property’s title. This history is detailed in the chain of title, which is essentially a record of a property’s ownership.

Understanding chain of title helps buyers, sellers and real estate professionals ensure transparency, verify ownership rights and mitigate the potential risks associated with disputed or unclear property ownership.

What Is Chain Of Title In Real Estate?

Chain of title is often described as the sequence of historical transfers of title to a property from the current owner all the way back to the original owner. This also applies to land without a home on it. To put it simply, chain of title is the story of a home’s ownership. It covers who built and first owned the house, who bought it next and who owned it each time it was sold – all the way to the present day.

A chain of title should always reflect continuous, unbroken ownership. A property deed proves current ownership of real property, but the chain of title becomes essential if your right to own the property is ever called into question.

Why Is Chain Of Title Important?

Historically, real estate and land ownership have been carefully recorded and protected for a number of reasons. From a broad perspective, chain of title is important because it allows you to have a clear paper trail for land you own.

Otherwise, it would essentially be the “Wild West” with regard to who lived where and who owned what. A legal claim to land has traditionally implied both ownership and tax liability. Chain of title helps clarify your rights to your property after buying it.

What Rights And Documents Are Involved With A Chain Of Title?

Several rights and documents play a role in a chain of title in real estate, including:

• Deed: A deed is a written document that transfers title (ownership) or an interest in property to another person.
• Title: A property title is a concept referring to the legal ownership of a property.
• Bundle of rights: “Bundle of rights” is the term used for the set of legal privileges generally afforded to a real estate buyer, and these rights cover everything you can and can’t do with the property as its owner.

All of these components work together with the chain of title, so it’s critical that they’re all accurate and properly interpreted. 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 with a properly recorded deed will prevail over one who claims the property without one.

Where Can You Find Your Home’s Chain Of Title?

When you purchase your home, a title company prepares a title search. As part of that title search, the chain of title is researched to verify ownership, ensure judgments and taxes have been settled, and identify any liens (legal claims on assets that allow the holder to obtain access to the property if debts aren’t paid).

The title company will also find any mortgages held on the property and do a land survey – typically reported in the deed – to identify the physical boundaries. After gathering all that information, title companies create something called a title abstract, which is a condensed history of the title. If the abstract of the title is clear, the sale is good to go from that perspective.

How Do Liens Affect Chain Of Title?

Liens follow the property, not the owner, so they must be paid before any sale or transfer of title 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 must pay them.

Two common types of liens can impact a property’s chain of title.

Mortgage Liens

Homes with mortgages are encumbered with a mortgage lien, which simply means you can’t sell the property on which the mortgage is based unless you pay the mortgage in full with the sale proceeds or out of pocket. A mortgage lien is also known as a voluntary lien, because you chose to have it applied when you took out the mortgage.

Involuntary Liens

In addition to voluntary liens on a property, there are 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). Depending on its bylaws, a homeowners association may also be able to place a lien on your property for failure to pay dues.

How Do You Know If Your Title Is Okay?

The title company will attempt to make sure there are no clouds hanging over the title before you close on a property, but something could always pop up in the future. As with any investment, you face some element of risk. And, as with many other big investments such as a car or boat, insurance is available for your title as well. Claims against a property can arise at any time, but ensuring 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 – may 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 foreclosure, but it’s unlikely if you have title insurance.

The Bottom Line

A chain of title document outlines a property’s ownership history. Establishing this history can preempt any confusion or debate over who owns the property – which is paramount if ownership of your property is ever challenged.

Learning about chain of title is one step you can take to prepare for the purchase of your dream home. If you’re ready to get started with the home buying process, start an application for an initial mortgage approval online today.