Clouds on title, liens, encroachments and encumbrances. Terms like these pop up when you buy or sell a house. It's smart to understand the down and dirty of what clearing title means -- as well as the risks of calling a house that has title defects home. Generally, the law does not require a seller to warrant or clear title before a house sale closes. However, there are other reasons to ask for a clean slate before you sign on the dotted line.
TL;DR (Too Long; Didn't Read)
In some cases, a house can be sold without clearing the title.
Homes buyers generally receive marketable title, sometimes called clear title, when they seal their deals. Clear title means the seller can't leave you holding the bag for title defects at closing. For example, a seller's mortgage must be paid in full and discharged from the county land records at closing.
Marketable title doesn't mean there are no title defects -- or clouds on title. A utility easement that allows the electric company to tromp through your yard to repair a downed wire is a cloud on title, but it won't usually render your title unmarketable.
Your bank or mortgage company won't open its wallet for a loan unless the house you're buying has clear title. Lenders also require title insurance policies to protect them from title disputes after closing. Sellers generally pay for title insurance policies for buyers., but buyers pick up the tab for policies covering their lenders. Prices for title policies vary in different states and between title companies. Dial up a local title company for a specific quote.
Cash and Seller-Financing
Cash and seller-financed deals can have differently negotiated title requirements because mortgages aren't in the mix. Sellers can transfer houses using quit-claim deeds, which don't guarantee clear title. Buyers may choose to take on title risks. For example, a neighbor's garage may be over a lot line, creating an encroachment on the property you are buying. You may decide to roll the dice and see how things go with your new neighbor after closing.
Even though some house sales can close without clearing title, clouds such as mortgage, construction and judgment liens can lead to foreclosures and lost money. Other title issues, such as a property line dispute, can create closing headaches if you decide to resell your property. A buyer should drop into his local lawyer's office and get some expert advice before agreeing to buy a house without first clearing its title.
Maggie Lourdes is a full-time attorney in southeast Michigan. She teaches law at Cleary University in Ann Arbor and online for National University in San Diego. Her writing has been featured in "Realtor Magazine," the N.Y. State Bar's "Health Law Journal," "Oakland County Legal News," "Michigan Probate & Estate Planning Journal," "Eye Spy Magazine" and "Surplus Today" magazine.