Selling or buying a home with a cloud on title

In real estate, a title cloud refers to any unresolved issues with a property title.

Elissa

Elissa Suh

Published March 13, 2020

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KEY TAKEAWAYS

  • A cloud on title is also known as a title defect

  • Examples of title clouds are liens, claims, or other encumbrances

  • A title without a cloud is called a clear title

  • You can get a clear title by satisfying any liens or filing an action to quiet title in court

When you buy a house, you want to make sure that it has a clear chain of title. A title is a document that proves someone has a right to ownership over the property, with the chain of title showing updates to the title document as the property changes ownership over the years. Mortgage lenders will typically require homebuyers to get a title check, which will reveal any issues with the title, like if the owner hasn’t been paying their mortgage or their taxes. Both of these could result in a lien, which is a common reason for a cloud on a title. Sellers and buyers alike should be aware of a title cloud on a home since they can complicate a real estate transaction.

Other reasons for a clouded title might be if an easement on the property exists, but its exact stipulations are unknown. Forgeries and other illegal defects in the chain of title can also result in a cloud on the title.

A cloud on a title might deter someone from buying it, as it increases the potential for liability for both and future parties, and it could reduce the value of the home. Fortunately there are ways to remove a cloud on a title. Keep reading to learn how.

What is a cloud on title?

A cloud on a title, also known as a title defect, indicates a potential problem regarding ownership. A title cloud is an unresolved issue regarding the property’s title or the chain of the title, which just means issues in the title’s past history.

A cloud on a title includes any liens, like:

  • Mortgage liens for delinquent payments (which may lead to foreclosure proceedings) -Tax liens for unpaid property taxes
  • Judgment liens against your property, which use it as a form of collateral when you lose a lawsuit
  • Mechanic’s lien for unpaid services to second-party contractors

Another encumbrance might be any fraudulent claims of ownership of the property. This may come from invalid deeds and forged or misrecorded documents. This and many of the liens mentioned above may result in lis pendens, or notice of impending legal action, which itself is a cloud on title.

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An unrecorded easement may also result in a title cloud as well. An easement lets someone other than the property owner legally use the property or land. (Easements will not cloud a title as long as they’re officially recorded. For example, a utility easement that allows a cable company to have wires across the land is a typical and expected easement that won’t cloud a title.) You can contact a real estate lawyer for more legal advice regarding easements.

Sometimes clouds on a title may exist due to a clerical error, like a misspelling or failure to record updates to the title. For example, there may be a cloud on a title for missing mortgage payments 50 years ago. The lender was likely repaid at some point, but the lien was never officially rectified. We’ll talk about how you could clear this defect next.

At the same time, if the previous owner did in fact miss mortgage payments and the lender never initiated foreclosure proceedings, a clouded title may exist because the lender would own the house, meaning that the homeowner has no right to sell it.

Consequences of a cloud on title

A cloud on title can have a negative impact on a real estate. It can devalue the home and make it harder to sell. If you’re the buyer, a clouded title that’s discovered after you've already closed on the property could force you out of your home. This might happen if the previous owner didn't have the right to sell the home in the first place. If you want to keep a home that has a title defect, you may have to pay a lot of money to clear the title.

How to remove a cloud on title

Clearing a title can be done in a few ways.

Resolve liens

If there is a cloud due to a lien on the property, then in order to remove the cloud you simply have to pay the necessary debts, whether they are missing mortgage payments or unpaid taxes.

File an action to quiet title

Another way to remove a cloud is to go to court. When you’re the buyer, filing a civil lawsuit against the previous homeowners or lienholders to clear the title may be helpful since the defects might have been caused by someone else. For example, you can bring a quiet title action against the previous property owner and the court may order them to repay and unpaid taxes to lift any lien.

An action to quiet title may take longer if issues of ownership stem from an inheritance dispute.

Use a quitclaim deed

This type of deed lets you transfer ownership of a property quickly and legally, but it has limited guarantees. However, they are effective in clearing title defects that are more minor, like a misspelling of the property owner, or if in the case of divorce a property owner changed their name but it was not yet reflected in the title chain.

Learn more about quitclaim deeds.

How to prevent a cloud on a title

A title defect can often result from unpaid liens. The easiest way to avoid this is to keep up with your housing payments. That means paying your mortgage on time as well as your taxes, including property taxes and income taxes.

Another way to prevent any title clouds in real estate is to get your own title insurance policy. Mortgage lenders require title insurance to protect them, but an owner’s policy is typically optional. Title insurance can protect you from expensive legal fees that may arise in the future if there are any issues with the title.

Learn more about title insurance.

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Personal Finance Editor

Elissa Suh

Personal Finance Editor

Elissa is a personal finance editor at Policygenius in New York City. She writes about estate planning, mortgages, and occasionally health insurance. In the past she has written about film and music.

Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.

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