How to Deal with Title Clouds

If you’re buying or selling a home, you will have a lot to do to get to closing day. There are inspections, such as wind mitigation inspection, pest inspection, and home inspection. In addition, there will be negotiations over the purchase offer and contingencies in the purchase contract. Closings generally are scheduled within thirty days from the acceptance of an offer. Just days before, if you’re the buyer, your lender will rerun your credit and check on your bank balance. This is to ensure you haven’t opened new lines of credit and have cash on-hand for closing.

What will also occur just before closing is a title search. This is another step in the due diligence process to ensure there are no clouds on the title. If the search does reveal encumbrances, it is highly likely the closing will be postponed and the sale might even be completely cancelled, depending on the situation.

What are Title Clouds?

A title cloud is an apparent claim or encumbrance that prevents the current owner of real property from transferring ownership to another party. These can be in the form of liens, such as a mechanic’s lien or tax lien, or, encumbrances. Clouds on the title are typically discovered by the title company that handles the closing. A title search is conducted, which goes over the mortgages, deeds and liens, mortgage assignments, recorded at the county office.

“…sales are postponed—even cancelled—because previously unknown title defects are moving in like storm clouds at the worst possible moment: right before the closing. There are any number of factors that can lead to a so-called clouded title, but practitioners are increasingly seeing issues with mortgage payoffs not being recorded.” —Realtor Magazine

If an encumbrance or lien is discovered during the title search, it can present a real problem. For the seller, it means not being able to transfer ownership legally and for the buyer, it of course, means that without a title, cannot take ownership.

How to Deal with Title Clouds

The typical scenario is a call from the title company or an attorney’s office handling the closing. The title search uncovered an unpaid mortgage, or, at least what appears to be an unpaid mortgage that’s associated with the property. It could also be that a contractor sued a previous owner, prevailed, and filed a mechanic’s lien against the property which wasn’t discovered during the last sale. Regardless of what it is, there are some ways to deal with title clouds:

  • Turn to your title insurance policy. If the effective date falls after the issue, that’s precisely what title insurance is for. You can file a claim and even ask for a reissue discount during this time.
  • Call your lender. If you don’t have title insurance or the issue occurred after the effective date, you can contact your lender to get additional documentation related to the issue.
  • Find previous owners. You might be in the unenviable position of having to locate and contact previous owners. If this is the situation, you’re probably better off to hire an attorney.
  • Hire a lawyer. Another step you can take is to go to a real estate lawyer and seek commencement of an action to quiet title.

Depending on the problem, it could take hours, days, or even weeks to resolve the issue. During this time, you’ll need to stay in contact with your real estate professional until it is settled.