A seamless title process is central to the home-buying experience, and real estate law lays down clear checks and balances to prevent title defects. Unfortunately, errors like unknown heirs, mistakes in public records, and suspicions of fraud can prevent mortgage transactions from going through. This includes both the purchase and repurchase of old properties as well as title transfers, which are now growing in volume.
As a result, mortgage companies often rely on title curative partners to fix issues with commercial and residential property titles. However, is it possible to avoid title defects in the first place – or at least minimize their risk – to prevent future bottlenecks? To understand how, we need to first consider the meaning of title defects.
What Are Title Defects in Mortgage Transactions?
A title refers to a record of property ownership that needs to be transferred when an existing commercial or residential property changes hands. A defective title, as per real estate law, occurs when an owner holds assets that cannot be legally transferred due to disputes or claims by someone else. Even when ownership is clear, the transaction can come to a standstill due to other defects such as:
- Missing details about ownership, such as conflicting bills or heirs or are not mentioned
- Taxation issues like delinquent property taxes
- Documentation errors like data omissions or missing signatures
- Legal disputes as per real estate law, including unresolved property surveys
- Failure to mention relevant financial information like liens for spousal support and bankruptcies
These are also referred to as “clouded” titles, which can be extremely simple or very difficult to resolve. For example, a matter of missing signatures may only require you to reach out to the necessary party and obtain their approval. However, missing ownership records may call for an extensive title search and exhaustive databases, involving time and money. Arrears, if any, may also need to be cleared before processing a mortgage transaction in compliance with real estate law.
Title curative partners help mortgage companies (specifically title agents and servicers) navigate these complexities and create title records that are ready to transfer. You can also follow a set of best practices to prevent title defects and minimize their damaging impact.
4 Best Practices for Title Defect Prevention
According to real estate law, the seller is responsible for presenting a marketable title to the prospective buyer. However, the buyer must also examine the title for any defects and present a notice to the seller before the transaction can go through. When a mortgage company funds the purchase, they need to acquire title insurance and minimize title defects to protect their interest in the property. Therefore, the following best practices are important:
1. Perform a rigorous title search
Through a title search, you can examine the public property records associated with a purchase to investigate the validity of ownership. A title search will reveal any disputed claims, even if the current owner is unaware of them. Thanks to a title search, mortgage companies can prevent acquiring defective titles that can become a liability later on. Mortgage technology partners like Nexval can help you run robust and comprehensive title searches in compliance with the US real estate law without relying on manual data management.
2. Be aware of the most common title defects
You need to know the most common reasons why a title may be clouded. Liens for debts – for example, child support, spousal support, repair work, bankruptcies, etc. – are a common issue and may erode a property’s value later on. Ownership disputes are also a common defect, which can arise from the omission of heirs or undiscovered wills. Wills discovered after the title was created can have a significant impact on property ownership rights, which can be corrected through title curative services. However, you need to know what you are looking for in order to find all the possible defects.
3. Don’t rule out the possibility of fraud
Not all title defects are accidental. For example, a previous owner of the property may have misrepresented themselves willfully and caused an error to creep in, which will inevitably affect future home buyers and their lenders. Title fraud cases are also on the rise in certain parts of the US, with several cases where fraudsters tried to claim a property through falsified titles, fake deeds, and fraudulent notarized signatures. Strong data capabilities can help protect against mortgage fraud of this kind, but only if you are vigilant and adopt a zero trust policy.
4. Conduct surveys to identify and prevent property encroachments
Easements (the right to enter property without owning it as per real estate law) can influence the value of a property you acquire as a mortgage company. The same goes for encroachments when an adjacent property owner builds a construction that moves into or hangs above the title in question. These ownership issues are difficult to find using title search, but, nevertheless, may pose a liability later. Extensive surveys – sometimes in partnership with a property preservation expert – can reveal such defects that also cause an encumbrance on the title.
Preventing Defects Through Title Process Automation
Given the data-intensive nature of title processes, mortgage companies must now turn to more advanced methods of checking and resolving title defects. Title workflow automation removes the chances of defects in key tasks like full title search, data entry, image indexing, title examination, etc. Automation can also aid in the title curative part of the job, making sure that the issues are resolved as accurately and expeditiously as possible.
Ultimately, title defects are an unavoidable part of mortgage transactions, and lenders must take every step they can to minimize the severity of clouded titles. Nexval’s bespoke title services, from search, and title curative to settlement and lien release, helps you begin every transaction on the right foot.
Speak with our Tech Gurus today to learn how.