When you purchase a home, there is an entire legal process in place to transfer the title of the home, or the legal ownership rights of the home, to you. Evidence of title is reflected in legal documents called deeds. While this may sound like a very straightforward process at such a high level, it’s a lot more complicated than simply handing over your money and taking the keys. There are several cases when the title wouldn’t be “clean,” meaning without issues. In these situations, you might not be the rightful owner of the property or there might be restrictions on your use of the property.
In this post, we’ll take a look at common title issues that can occur and how to protect yourself.
Common Title Issues
At Visio Lending, we’ve closed over 10,000 loans and have seen our fair share of title issues. Here are some of the top ones investors encounter:
Liens are a right to possession of a property belonging to another person until a debt owed by that person is discharged. Some examples of liens include a lien placed by the government for unpaid property taxes or a lien placed by a contractor or mechanic for unpaid services. In rare cases, even if a lien has been satisfied or released, it might not be properly documented or recorded.
Past Ownership Claims
Past ownership claims occur when someone from the past appears and claims a right to property ownership. These typically happen when a property has belonged to a family for generations and some long-lost relative feels entitled to ownership. Another instance of a past ownership claim could be if there was unlawful possession of the property somewhere along the chain of title (think of it as the genealogy of ownership).
Covenants of Record
Covenants of record are promises that the original owner made in the deed to someone else. This could be something like the use of the driveway for parking or the use of a storage shed and can vary widely from situation to situation.
Broken Chain of Title
This occurs when there is a gap in the ownership record during the span of the search. Broken chains of title are most common in properties that have been in families for a long time.
Errors in Public Record or Incorrect Legal Descriptions
Sometimes, clerical errors made on prior deeds can cause delays. Further, if there are any errors in legal descriptions attached to a deed, the deed is considered defective and therefore impacts the chain of title.
While foreclosed properties can be great real estate deals, the foreclosure process is a lengthy one with copious amounts of paperwork that often aren’t properly documented. Because they often are missing information or have a complex ownership history, foreclosures can frequently have some of the most title issues.
Probate is the legal process in which a court determines who is entitled to a person’s assets after they have died. Problems occur when a will is not probated, and the legal ownership has not been properly transferred. It is challenging to purchase a property when the legal owner is deceased.
Protect Yourself Against Title Issues with an Owner’s Title Policy
There are two types of title policies: A Lender’s Policy and an Owner’s Policy. A Lender’s Policy is required when you take out a mortgage loan, and an Owner’s Policy is often optional. We highly recommend getting both, and here’s why.
What is a Lender’s Policy?
Also called a Loan Policy, a Lender’s Policy is intended to protect the lender for the entire duration they maintain interest in the property. In the event that the buyers end up not having legal ownership of the property, the lender would be covered for any related legal defense costs and the remaining mortgage balance. The borrower would also be protected from having to pay what they still owe on the loan.
However, the borrower would not be covered on the down payment or for any money they already paid toward the principal. Plus, they would no longer have the property. That’s why Owner’s Policies are critical.
What is an Owner’s Policy?
Owner’s Title Policies (OTPs) offer the most protection for the buyer. Unlike Loan Policies, OTPs are a one-time cost and are in effect as long as you and your heirs own the property. As an added bonus, according to our Processing Team, they make the refinancing process a lot smoother. When refinancing your home, if any title issues come up and you do not have an OTP from the time of purchase, you will have to pay out of pocket to clear up the title issue.
Essentially, trying to get an OTP after title issues have surfaced is like trying to get Hazard Insurance after your house has been damaged. That’s why it is always best to get an OTP upfront, especially for investors with multiple properties looking to use their equity and grow their rental portfolios.
Familiarize Yourself with Title
Knowledge is another great way (besides actually getting an Owner’s Title Policy) to protect yourself. Take our quiz and see how you do.