What Is Chain Of Title And Why Is It Important?

Confusion over property rights can create tension between individuals and strain on the federal government’s and other more local municipalities’ ability to serve their residents. 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. Let’s take a closer look at what chain of title is, why it’s important and how to find it. 

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 the ownership 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.

A chain of title should always reflect continuous, unbroken ownership. There are other documents that prove current ownership of real property, 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.

What Documents Are Involved With A Chain Of Title?

There are several documents that play a role in a chain of title in real estate. A deed is the written document which transfers title (ownership) or an interest in property to another person. A property 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.

All of these documents work together as the chain of title. 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.

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 because it allows people to thrive in land they own. Otherwise, it would essentially be the “wild west” in terms of who lives where and who owns what.

Throughout history, land ownership implied both socioeconomic status and tax liability. It helps define the upward mobility of people, and serves as the basis for their obligation to pay taxes that contribute to society as a whole.

When you purchase your home, a title search is prepared by a title company. As part of the title search, 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 land 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 of title is clear, the sale is good to go and you’re headed to the closing table!

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!

Mortgage Liens

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 in full, either with the sale proceeds or out of pocket. 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.

Involuntary Liens

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 bylaws, for failure to pay dues.

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 has to pay them.

The title company will do its best to make sure there are no clouds on the title 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 foreclosure, but if you have title insurance, it’s very unlikely.

A chain of title document establishes a history of ownership of a specific property. This is important because it helps avoid confusion over who owns the property, and can come in handy if ownership of your property is ever challenged.

If you’re planning to go through a transfer of ownership as a result of buying a new home, learn more about title fees you’ll pay at closing.