Cloud On Title: What You Need To Know
Da'Vonne Duncan3-minute read
November 19, 2021
You may be wondering if a cloud on your title is important. The short answer is yes!
Say you’ve decided to sell your house. Let’s think of a real estate transaction or the lending process as a bright, sunny day. You might have to do minor repairs, but nothing out of the ordinary happens. Then, your real estate agent markets your property and you finally get an offer, but the transaction can’t be complete because you’re unable to reassign ownership to the buyer – here comes the storm. When something delays the painless transfer of a title, that’s considered a cloud. Clouds can be anything ranging from documents, claims and liens that become visible on a property’s title record.
This can be a red flag to property buyers since it complicates the home buying process, which is why clear titles are preferred. Read on to learn the meaning of a cloud on title and advice on how to avoid or mitigate the situation.
Understanding A Cloud On Title
A cloud on title, also known as a defective title, is an unresolved issue that indicates that ownership of a property may be in question. These issues can include claims or encumbrances related to easements, defective deeds or liens. One of the main problems with a cloud on a title is that it creates confusion about who owns the property. Some of the ways the title to a real estate property can be clouded include:
- Liens: The legal right or legal claim on a property that can be used as a guarantee to repay your debt to a creditor. Liens can be attached to both personal property and real property. A mortgage lien or property tax lien is the most common legal claim on real property, meaning that mortgage payments or taxes are owed. This can occur when a homeowner defaults on their payments but can be avoided when fees are paid on time.
- Claims: A legal instrument filed with the court of law to resolve any disputes regarding real estate.
- Encumbrances: A limit on how an owner can use real estate, which is created by a party that is not the owner. An encumbrance doesn’t need to be valid to create a cloud, since some affect the marketability and transferability of a property, while others don’t. For instance, zoning laws are common encumbrances that prevent homes from being used for commercial purposes. Many homes have zoning laws and don't affect the transfer of a title.
Now that we know failure to pay your mortgage or property taxes, as well as encumbrances, can result in a cloud on your title, here are other unresolved issues that can make ownership unclear.
- Mechanic’s/construction lien: someone didn’t pay for work done on the property
- Probate issues: property owner dies without defining in a will who gains control
- Clerical/filing errors
- Unknown heirs
- Fraud and forgery
- Boundary disputes
- A false representation of marital status
- Unreleased deeds of trust
Discovering A Defective Title
Now that we discussed what causes a defective title, let’s describe how you can find out if a property title has a cloud.
Clouds on a title are typically found during a title search, which is the best way to discover if a real estate property has a defective title. Title searches are completed to confirm the rightful owner of the property and find any restrictions on the title, by reviewing the property’s public records. Typically, title searches are necessary during the mortgage origination process to protect lenders against third-party claims that are used as collateral. Often, real estate agents can use a cloud on a title as a negotiating tactic against a seller to decrease the property value.
How To Avoid Or Clear A Clouded Title
Clouds on real estate titles are preventable. Property owners can ensure they have a clear title through a few methods:
- Create detailed contracts that outline timelines and payment schedules when working with contractors.
- Periodically check title records at the county recorder’s office to identify and fix issues as they arise.
- Ensure that tax and mortgage payments are made on time.
Purchasing separate owner's title insurance is another way to avoid clouds on titles and financial loss when a defect occurs. Most title insurance protects lenders; without protection, buyers could lose their down payment and equity. Once issues with your property title begin to surface, a title insurance policy covers fees associated with resolving past issues not found during the title search. Besides fees, title insurance can also cover risks such as falsified documents, incorrect filing and ownership.
The Bottom Line
If you’re interested in buying or selling a home, it’s always a great idea to conduct a title search and look for clouds to prevent financial loss. Even with a cloud on a title, real estate transactions can still occur once the title is cleared.
Need more information about buying a house or other property? Be sure to visit the Rocket Mortgage® Learning Center.
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