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Selling or buying a house with a cloud on title

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A house title is a document that gives the homeowner the legal right to own the property. When you purchase a home, the previous owner’s name is removed from the title, and your name replaces it. Before you even buy a home, your mortgage lender will typically require a title check to make sure there aren’t any red flags.

One possible red flag is called a cloud on title, which essentially means that there is some question or doubt as to who owns the home. If a home has a cloud on title, it means there could be unforeseen liabilities for the prospective home buyer, which could disrupt the completion of the sale. 

From a seller’s perspective, having a home with a cloud on title makes the house more difficult to sell, and typically reduces the value of the home. In this article, we’ll explain what you need to know about cloud on titles, how you can prevent it, and how you can remove one from your home’s title.

What is a cloud on title?

Whether you’re thinking about buying or selling a home, title checks can verify any possible areas of concern. A cloud on title, which is also called a title defect, is one issue that can show up on a title and indicates a problem with ownership. Either there is an existing disparity with the property’s ownership, or there was an unresolved issue at some point in the title’s history.

There are a few different situations that can lead to a cloud on title. In the next section, we’ll look at some of the most common reasons that a home you’re buying or selling might have a title defect.

What causes a cloud on title?

There are several fairly significant events discussed below that can result in a cloud on title:

Foreclosure

If the title holder stops paying their mortgage and the home goes into foreclosure, the property will have a clouded title. In that case, the mortgage company would technically own the home, making it very difficult for the person living there to sell the home to a buyer.

Liens 

Any unpaid liens on a property title can cause a title defect. For instance, if a homeowner uses their home as collateral for a loan, or has a mechanic’s lien for construction work, the lien will remain on the title until the homeowner has paid off their debt. During that time, the property will have a cloud on title.

Probate

Probate issues are another common cause of clouded titles. For example, if the previous homeowner passes away and doesn’t specify in their will who will become the new owner, it’s not clear who the legal owner is.

Fraud

Any type of fraud related to the property will also result in a title defect. In the event a false deed was accepted as legitimate, and is later found to be fraudulent, it creates confusion around who the legal title holder is, resulting in a cloud on title. 

What are the consequences of a cloud on title?

Clouded titles can be a major cause of frustration for both buyers and sellers. If a buyer finds out that a home they are interested in purchasing has a title defect, they may be hesitant to go through with the sale due to the complications. Buying a home and later finding out that there is a question over ownership can lead to liability issues and legal battles, not to mention extensive time delays.

From a seller’s perspective, having a cloud on title makes it much harder to sell the home. Not only can it bring down the property value, but any potential buyer who runs a title check will know about the title defect. If a buyer can’t get a mortgage on the home you’re selling because of the cloud, it could sit on the market for months.

Removing a cloud on a title

If you’re thinking about buying or selling a home with a cloud on title, it’s possible—and recommended—to get the cloud removed. However, the options can be costly whether you’re a buyer or seller. Here are three primary ways to remove a cloud on title: 

Repay your debt

If you have a lien that is causing a cloud on title for a property you own, an simplest way to remove the cloud is to repay the debt. For instance, if you’ve stopped paying your mortgage or have past-due taxes, paying what you owe will clear the title. 

File a lawsuit against the previous owner

If you’ve recently purchased a home and were not aware it had a clouded title, you can file a civil lawsuit against the previous property owner. This is particularly useful if the previous owner has outstanding liens. In court, the judge can order the previous owner to repay their debt to remove the cloud.

File a quitclaim deed

The last option is to file a quitclaim deed. A quitclaim deed is an easy way to fix title defects due to clerical errors, like out of date records or a misspelling of the title holder’s name. You don’t need a lawyer to file a quitclaim deed, but they come with limited guarantees, so it should only be used to transfer the title to or from someone you know and trust. This option is best for simple probate issues. 

Preventing a cloud on a title

Cloud on titles are usually preventable. The best way to avoid a clouded title is to stay current on all payments, including your mortgage and taxes. Another option is to purchase title insurance. If you discover any issues with your property title, having a title insurance policy can help you pay for associated legal fees in resolving the matter. 

The takeaway

  • A cloud on title, also called a title defect, indicates an issue with property ownership.
  • Foreclosure, liens, probate issues and fraud are all common causes of a title defect.
  • Removing a cloud is possible; usually done by repaying a debt or taking legal action against the previous property owner.
  • To prevent a clouded title, make mortgage and tax payments on-time, and consider getting title insurance.

Before you buy or sell a home, it’s important to run a title check and look for a cloud on title. Having a cloud on title makes it difficult to sell a home, because the property decreases in value and makes potential buyers skittish about liabilities. However, you can remove a cloud by repaying debts, taking legal action against the previous owner, or transferring ownership using a quitclaim deed. 

Elizabeth Rivelli

Elizabeth is an insurance writer for coverage.com, where she covers insurance providers and reviews policies to help consumers find comprehensive and affordable coverage for every area of their life. She has more than three years of writing experience for top online insurance and finance publications.

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