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).