By Jeff Keleher on 3/24/2021
Tags: buying a home before you buy
Every piece of property comes with its own history — and not all of it’s good. Before signing the deed on your dream house, you need to be fully aware of its history, especially when it comes to ownership claims. Doing so will help you avoid a litany of messy legal issues when you buy a home.
Both the abstract of title and chain of title shed light on a home’s background, detailing when the property changed hands, who rightfully owns the property today and what — if any — outstanding legal actions or claims have been made on the land. Although title insurance has largely taken over this function in the past couple of decades, certain real estate markets — Iowa, most notably — still use the abstract and chain of title.
Even though your lender title insurance should cover any unforeseen title defects in most cases, it still may be useful to check the abstract of title before you take out a mortgage on new property. If nothing else, knowing your new home has an unbroken chain of title can provide a sense of calm during the often-hectic closing process.
Read on to learn more about the importance of chain of title and abstract of title in the homebuying journey and how you can ensure your new house is in good standing.
The abstract of title is a condensed overview of the entire history of the property, specifically looking at changes in ownership, whether it’s through a direct sale, personal gift, inheritance, foreclosure or tax sale. This important document will also include any legal concerns, such as liens, encroachments, encumbrances, easements and unpaid property taxes, that might affect a smooth transfer of property when it is sold.
Every piece of property, whether it’s a house, commercial building or undeveloped land, has a title detailing who retains ownership rights. And every title captures a complete picture of the property’s ownership history, as well as any outstanding claims that might impact a clean transfer of ownership to a new buyer. If so inclined, borrowers could also access public land records to research the history of any piece of real estate.
Chain of title defined
The chain of title is, in essence, the history of a property’s ownership as it passes from one person to another. You will sometimes see the property title search itself referred to as the chain of title, as well.
Similar to the abstract, the chain of title provides a roadmap of how a piece of property has changed hands over the years. Verifying an unbroken chain of title is absolutely essential to secure financing for a new home. It also gives you peace of mind when closing on a house, so you don’t have to worry about some unforeseen oversight or years-old claim muddying the ownership waters with your new home.
The biggest difference between an abstract of title and chain of title is that the former is a tangible, physical document. Despite being a condensed breakdown of the property’s history, an abstract of title can actually be quite lengthy due to the sheer amount of publicly-recorded information and legal documentation that go into it.
Conversely, the chain of title isn’t a piece of paper — or stack of papers, as the case may be — you can hold in your hands. Depending on the circumstances, it can act both as the general history of a piece of property as well as the process of confirming how the title has passed from one owner to another through the years.
A chain of title search will likely involve a number of recorded documents, such as deeds, property transfer paperwork, financial records and any legal documentation on the books.
Not sure how to conduct a property title search? Don’t worry, your lender will make the necessary arrangements with the title company or county recorder to go through all available documents.
Why do abstract of title & chain of title matter?
A clear title is an absolute must when buying a home — or commercial real estate, for that matter. Having to address liens, easements, ownership disputes and other legal claims can be a nightmare for homeowners, so it’s good to know your new house or property will transfer over to you without any issues.
Also, keep in mind that your mortgage lender will want to review the abstract of title and confirm the chain of title before moving forward with a loan. It’s always advantageous for a bank or lender to hold first lien position on any property — that is, if the bank forecloses on the property, it will be repaid first before other parties with claims on the home. Title defects like outstanding mortgages, liens and encumbrances often take precedence over a new mortgage in the event of a foreclosure.
Bottom line: Your lender may not approve a loan on a home with a broken chain of title.
How to check the chain of title
Any real estate purchase will require a title search to verify that the title is clear and that the seller is legally authorized to transfer ownership to another person or entity. Before closing on the sale, your lender — more specifically, your lender’s attorney — will contract a third-party title company to conduct a property title search verifying ownership and checking land records for any title defects that might be of concern.
In some cases, a seller may present the abstract of title before a buyer even puts in an offer on their house, but if not, the title search will dig up a copy of the abstract.
A thorough title search can go back several decades or more, but your lender may opt for a shorter length of time instead. A 24-month chain of title search is fairly common practice for lenders that are more concerned about flagging any recent activity suggesting mortgage fraud or some other illegal transaction.
Once the title company completes the title search and checks that there are no title defects, the lender’s attorney will issue a certificate of title. This important document confirms that the seller actually owns the title and has the legal standing to transfer ownership to another person.
Look out for these title defects
In a perfect world, property titles would always change hands without incident, creating a clear unbroken chain of title every time someone buys a house.
But we don’t live in a perfect world, and it’s easy for simple oversights to impact the legal status of real estate holdings. Divorces, inheritances and personal gifts can all call into question who actually owns a piece of property — and that’s before you get into legal claims like liens and easements.
Keep an eye out for these common title defects when checking your abstract of title and chain of title:
- Liens and easements
- Clerical errors
- Outstanding mortgages
- Legal restrictions
Liens and easements
The seller doesn’t necessarily lay sole claim to a piece of property. There could be any number of parties with ownership interests as well. For instance, creditors may put liens on homes used as collateral for unpaid debts, creating a more complicated picture of who actually owns the property.
Easements, meanwhile, give other persons or organizations the right to access the property in some capacity. For instance, utility companies may have easements in place that allow them to repair or modify any infrastructure that sits on the property, including power lines, telephone poles, sewer lines and telecom cables. Such easements could stand in the way of any improvements or development work you planned for your new home. If you were, for example, interested in putting a swimming pool in your new backyard, a utility company’s right to access buried power lines would take precedence over that home improvement project.
Clerical errors
Yes, even simple mistakes with legal paperwork can throw a wrench into your home ownership prospects. Deeds with missing or incorrect information, such as putting down the wrong lot number, can break the chain of title. Seemingly trivial paperwork errors sometimes require lengthy legal proceedings to correct.
Outstanding mortgages
When a homeowner takes a second mortgage out on their house, records of that transaction don’t always carry over when the property changes hands to a new owner down the road. It may seem unlikely, but there are cases where a title search unearths an outstanding mortgage from decades earlier that was never fully repaid. In those situations, your lender may be hesitant to grant a mortgage loan since it’s lost first lien position.
Legal restrictions
It’s usually less of a concern for homebuyers, but title searches may bring up previously unidentified legal issues that restrict how the property can be used. Often, these scenarios involve land originally used for a specific purpose predating any specific zoning laws that affect the property. While this particular issue is unlikely to impact house hunters, it’s good to know nonetheless.
What should you do if there is a problem with your title?
Such chain of title problems may seem unlikely, but they do happen. And when the chain of title is broken, you could be in for a long legal fight to sort things out.
Take, for example, a California couple who inherited a house from family members only to find that those relatives never legally owned the home, despite living there for several decades. When the couple tried to sell the house to a new owner, the title company blocked the sale due to the broken chain of title.
Your title insurance will cover the most common and simple title defects like clerical errors. More complicated problems such as an ownership dispute between family members or heirs require additional legal action that isn't going to be as quick and easy to process.
Clearing up those kinds of issues could take months — or longer — to complete. Buyers may decide they would rather simply walk away from a sale than wait things out, even if it potentially means losing the earnest money deposit.
From a seller’s standpoint, you should start working to fix any chain of title defects or discrepancies as quickly as possible. Any lingering chain of title issue means your legal status as homeowner is in jeopardy, and the sooner those problems are resolved, the better.
In conclusion
Buying any piece of property is a huge investment, and you don’t want to go into these transactions blind. Both an abstract of title and chain of title give prospective buyers insight into the full history of a house, building or parcel of land. Having that information up front will help you avoid any legal issues when transferring ownership after a sale.
Moreover, your lender will undoubtedly require an abstract of title to confirm a clear title before going forward with your mortgage loan. A broken chain of title could delay a sale or even kill the deal entirely.
Remember: Always do your due diligence and check with your real estate agent to ensure everything’s in order before closing on a house.
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