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What is a ‘Cloud’ on Title?

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This might be a rather obscure term for the consumer but it’s important to know what it means and how it might affect getting your home loan. First, a title report is a report that shows the chain of ownership over the years. Each time the property changes hands, that change will appear on the report. When a seller sells a property to the buyer, that transaction will be officially recorded. Before a lender makes a mortgage loan, reviewing a clean title report is essential. If it’s not clean, the lender will back away until the issue is resolved.

A cloud on title might be a previous lien.  For example, there might be an existing mortgage showing up on the property. This can occur in the instance of a foreclosure where the unpaid mortgage is still appearing because the old home loan was never paid. A lender won’t issue a mortgage with a foreclosure showing an outstanding mortgage. When someone defaults on a home loan, the lender can foreclose and when it does it becomes the sole owner of the property. There is no workaround for such an occurrence, only paying off the old mortgage. Sometimes, the lender might negotiate to reduce the outstanding balance due.

Also, when there is a foreclosure, it’s likely there are outstanding property taxes as well. These taxes will also appear separately on the title report and, like an old mortgage, will have to be settled before moving too much further. If the taxes aren’t paid, the title report will reflect that. These taxes will stay on the report until they’re removed. And, like an old mortgage, will have to be paid before ownership (title) can transfer. Property taxes can’t be renegotiated. They are what they are and will have to be paid prior to any sale.

There’s also the notion of a mechanic’s lien. A mechanic’s lien occurs when a contractor begins a new remodel. This lien ensures the contractor is paid. Once the work is completed, the contractor will file a lien release. If the contractor does not get paid, the lien will stay there and prohibit any transfer of ownership until the lien has been settled.

Once all outstanding issues have been resolved, the lender can then move forward with the loan approval. A title report is one of the first things a lender orders to make sure there are no outstanding issues which would prohibit the transfer of ownership.

 

Written by David Reed for www.RealtyTimes.com Copyright © 2024 Realty Times All Rights Reserved. Reed is from Austin, Texas and is the author of The Real Estate Investor’s Guide to Financing, Your Guide to VA Loans and Decoding the New Mortgage Market. A Senior Loan Officer and Mortgage Executive for more than 20 years, he has also appeared on CNN, CNBC, Fox Business, Fox and Friends and the Today In New York show.

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