A clear title. The term is commonly used to mean the deed holder can prove ownership, unquestionably. To verify that, a title company can conduct a title search.
Other parties’ claims on the title are called title defects, or clouds on title.
What do these claims look like? They might be mortgage liens, court judgments, contracts with renters, solar contracts, or any agreements to allow access to part of the property. There could be unpaid taxes in the past, claims by relatives involving their rights in foreclosures or inheritances, even liens for fees and fines imposed by homeowners’ associations.
Having a clear title matters to a homeowner. Selling isn’t an option while there are liens or claims against the title. Straightforward enough… But there are some finer points worth knowing.
Clear Versus Marketable
Although we talk about a clear title when we mean a home is free of any defects that could stop a sale, legally speaking, that’s a marketable title.
Whose title is clear from zoning restrictions, setbacks from the roads, easements for utility servicers, a shared driveway or something else? Maybe there’s a hiking path that the local trail club has permission to use, or a pathway to a boat dock… And that’s usually just fine. As the Independence Title company puts the point:
Most titles are marketable titles. These have encumbrances on the deed, but none of the encumbrances cause concern for litigation or property sale.
And most homeowners have some kind of financial lien(s). Homes usually have mortgage loans or home equity lines of credit (HELOCs) recorded on their titles. Nevertheless, the title is marketable if defects can be resolved by closing day. They usually can. So, in most cases, sellers mark “NO” where the disclosure form asks: “Is there any reason you know, including any title defects, that would obstruct you from conveying clear title?”
The seller should bring any known issues to the attention of their agent so the title company can resolve them. If the buyer accepts a title with disclosed defects, the buyer may not expect to hit the insurer up for coverage on those known issues.
Is a home’s boundary or easement under dispute? Then a property survey isn’t just nice to have; it’s essential.
What If a Home Has an Unmarketable Title? How Can the Parties Be Cleared to Close?
When the time comes to sell a property, the owner should clear any tax liens, zoning or permitting violations, and the mortgage (which can be paid off at closing if not before). The buyer’s lender will want all of this addressed before issuing the loan. This is why lenders need the title search. Loan approval depends on knowing:
- If anyone (other than the sellers who will be named on the deed) may own an interest in the property.
- If old, unpaid taxes, construction bills, fines, or fees, including homeowner association dues, etc.) have left clouds on the title.
- If past court-ordered judgments (child support, bankruptcy filings, etc.) created liens on the title.
- If current or potential lawsuits create risks for the property value.
The title company produces its preliminary report after it examines the home seller’s chain of title for problematic encumbrances or restrictions. The report will find the property either marketable or unmarketable.
If the title isn’t marketable, then the path to financing and purchasing is blocked. To go ahead with the sale, the homeowner must quickly resolve the claims. Often, that means paying off a mortgage lien. The owner should record the mortgage release document with the county, as public notice that the mortgage no longer constitutes a lien on the property.
Marketable Title? Check. Now, Why Do We Need Title Insurance?
Even if the seller and buyer are doing everything right, they can’t know all the things that might have happened to a chain of title. We don’t have to go back too far in the chain to find documents created before the time of computers. To err is human.
Was every deed in the chain of title signed by the true owner(s)? Was the property description exactly replicated each time the deed changed hands? If this property was inherited in the past, was it done with the proper paperwork? And finally, what will happen when a deal is cleared to close, but one of those defects, or a different one, slips by unnoticed? Missed details can lead to title questions long after closing.
This brings us to why lenders want buyers to insure the titles to the home — which is their loan collateral.
There are insurance products for lenders (lender’s title policy), and for home buyers (owner’s title policy). The insurance signifies that the homeowner has good title — and the insurer will pay to address any undiscovered defects listed in the policy’s coverage. An extended title policy covers more situations. This can spare a homeowner the cost of fixing unknown debts or claims that might have attached themselves to the title in the past.
Offers “subject to…”? In any home purchase, and especially in sales of distressed properties, read the contract. Buyers may shoulder title risks. Some disclaimers tell the buyer that a seller’s acceptance of an offer is “subject to…” followed by a list of exceptions that cancel the agreement if a seller can’t or won’t resolve defects.
As the National Association of Insurance Commissioners (NAIC®) states:
Nearly all mortgage lenders require that the home buyer purchase the lender’s title insurance policy for an amount equal to their mortgage loan.
Buyers who want lasting protection in their own names should consider buying an owner’s title policy at closing, for a single premium payment. Why get that second policy? Because then there’s coverage for the home buyer. The lender’s policy covers only the lender’s interest in the property.
When All Else Fails, Ask a Title Expert
If a title defect turns up and stalls a deal, the buyer and seller and their agents need to work together to navigate the unexpected turn. If there are unresolved liens for loans, construction bills, or other financial claims, the parties may negotiate to have part of the seller’s proceeds cover the debt. In sticky situations, a title company’s experts can resolve the matter and bring the parties to a successful closing.
Most real estate transfers involve loans. A lender looks at title companies’ findings to assess its risks. In that sense, a title company’s work makes the real estate market safer for consumers and for lenders. Big thanks are due to the title professionals who protect the integrity of home titles every day.
Supporting References
Carissa Rawson for The Balance: What Is a Clear Title? Clear Titles Explained in Four Minutes or Less (updated Dec. 31, 2021).
Independence Title via TitleRate.com: What Is the Difference Between Clear Title and Marketable Title?
Offer to Purchase and Contract of Sale (VA Form 26-6705).
NAIC® Center for Insurance Policy and Research: Title Insurance (updated May 31, 2023).
Deeds.com: Behind the Scenes of a Home Purchase – What’s Your Title Company Doing? (Feb. 7, 2024).
And as linked.
More on topics: Title search frequently asked questions, Opinion of title
Photo credits: Vonsky87, CC-BY-SA 3.0 unported (cropped); and Mikhail Nilov, via Pexels.