Contract to Close: Title Search, Removing Encumbrances, and Title Insurance
In addition to the physical inspection of the property and the mortgage
lender working their processes in order to commit to the loan, a third process
works in parallel to ensure a proper transfer of ownership with no unpleasant
surprises. This is the title search. For the sake of simplicity, I’ll also describe
the removal of encumbrance and obtaining title insurance in this post. It is,
after all, the process during contract to close that a buyer has the least
involvement in.
The goal of the title search is essentially to make sure there are no
disputed claims to ownership of the property. If someone else claims to have
ownership or some sort of claim on the property, then the seller would not have
the right to sell it… but unfortunately that would largely be the buyer’s (and
the lender’s) problem if they’ve given the money for it already.
The process of doing a title search involves looking at public records
in order to discover history of ownership, liens, easements on the property, and
other agreements related to it. Because these are public records, theoretically
anyone can do this research. However, it is usually performed by a title
abstractor at a title company since a certain amount of expertise is required
to navigate the record system. The researcher prepares an abstract of title,
which is a summary of the most pertinent findings. The chain of title shows a
history and transfers of ownership.
Potential problems that a title search can identify can be simple recording
errors in the records which could cause confusion in the future, perhaps even forgeries
of false claims to ownership, or illegal deeds agreed to by a party deemed to
have an unsound mind, who was a minor, or who was an undocumented immigrant. More
common issues might be a “mechanic’s lien” (when a contractor performs work on
the property and is not yet paid, they can file a lien against the property and
the property itself serves as collateral), an unknown easement (for example if
a previous owner granted the owner of the neighboring property rights to drive
through the property’s driveway), or a missing will or a missing heir from a
past owner that had since been discovered. If know living heir of a previous
owner was identified and the state sold the property after the owner died, a long-lost
grandchild who discovers the situation could contest ownership of the property.
If such issues could jeopardize clear ownership for the new buyer, these clouds
on the title need to be resolved before closing on the property.
Unknown title encumbrances such as these are not super common, but home
purchases are a big deal. To avoid putting such large sums of money in jeopardy,
title insurance is usually put in place. This is an insurance policy that protects the
buyer if future problems arise such as liens against the property that were not
identified during the title search. Once the search is performed, encumbrances
are removed, and title insurance is in place, you as the buyer are set to receive
clear title at closing (subject to your mortgage lien of course, unless you’re
a cash buyer).
Comments
Post a Comment