When it’s time to sell your home, you will probably make repairs, do some cosmetic work, and then have your real estate agent take all of the necessary steps to market your property.
Once you have accepted an offer and successfully negotiated with the buyer, it can be a shock to hear that there may be a “cloud” on your property’s title. If you get this kind of news near closing, you may be wondering: Does it really matter if I have a “cloud” on my title? The short answer? Yes.
What Is A Cloud On Title?
A cloud on title is a situation in which one or more liens are recorded against a property’s title. The most common liens that appear on title are recorded mortgages, unpaid contractor or supplier debts, and state and federal tax liens.
A lien against a property’s title is a legal claim that one or more creditors have on the property in the event that the owner doesn’t pay them. When an owner fails to pay a contractor or supplier, county and state governments often file a tax lien against the real estate to recover the funds they believe they are owed.
The owner of the property remains responsible for the debt even after it is recorded as a lien against the title.
Why Would There Be A Lien On Your Home’s Title?
There are a few common reasons that a lien might appear against your title:
- Someone Has An Unpaid Mortgage Or Other Debt On The Property: The person who held the mortgage on the property before you bought it may have not paid off their lien at the time of the sale.
- Someone Owed You Money For Work On The Property: A contractor or supplier who worked on the property before you sold it may have not paid off their lien at the time of the sale.
- You Owe State Or Federal Taxes: If you failed to pay state or federal income taxes during the time you were the owner of the property, a tax lien may be on the title to collect the debt.
How To Find Out If You Have A Lien And What It Is
There are two ways to find out if there is a lien on your title:
- Get A Free Title Report: You can order a free title report at any time. This report reveals the liens and other problems with the title to your property.
- Order A Full Title Report When You Are Ready To Sell: When you are ready to sell the property, you are required to order a full title report showing any existing liens. If there is a lien on the title, it will be revealed on the report and you’ll have to take it into account in your sale.
- There are two ways to get a copy of the title report for your property: you can go online to a company that offers free title reports, or you can hire a title company to conduct a complete title search and provide you with a title report.
Selling With A Mortgage Or Equity Loan Lien On Title
If the mortgage lien is easy to pay off, you may be able to sell the house with the mortgage lien still on the title. The buyer can use their cash to pay off the mortgage lien, and you can repay them with a promissory note.
If there are equity loans on the property, you may be able to get the bank that holds those loans to release them. If you’re lucky, the bank may even be willing to release the mortgage lien simultaneously.
If the mortgage lien is relatively small, you may be able to persuade the buyer to take the mortgage as a condition of sale. This lets you pay off the mortgage lien with their cash and have the buyer take over the payments.
Selling With An Attorney Or Tax Escrow lien On Title
If the lien is a tax lien, you may be able to persuade the attorney or government representative who has the lien to release it. If the lien is an attorney lien, the attorney may be willing to release it in return for a payment.
If the tax lien is an escrow lien, the government representative holding it may be willing to release it in exchange for money to cover the taxes owed by you or the previous owner.
If you can’t get the lien holder to agree to release the lien, you may be able to sell the property “as is” for less than the property would be worth if it didn’t have the lien.
Selling With An IRS Or Back Taxes lien On Title
If the tax lien is for income taxes that you failed to pay, there’s not much you can do to get rid of it. You can try to negotiate a payment plan with the IRS or state tax authority. You can try to get the buyer to pay off the tax lien by accepting a lower sales price.
You can also try to get the buyer to pay into an escrow account covering the amount of the lien. The buyer would then get their money back when the lien is released. If the tax lien is for a property tax that you failed to pay, you may be able to get the authority who has the lien to accept a payment plan or lump-sum payment that covers the amount of the lien plus interest.
Selling With A Construction lien Or Builder’s lien On Title
If the lien is for construction work performed at the property, you can consider paying the lien off with a lump-sum payment. You may be able to negotiate the lien holder’s terms if you pay the lien in full.
You may be able to get the buyer to pay off the construction lien with a higher sales price or have them pay into an escrow account. You can also try to sell the property as is for less than it would be worth without the construction lien on the title.
Sell The Home Before The Deadline To Pay The Lien In Full
If the tax lien is for back taxes or an attorney lien is for a contractor who performed work on the property, you may be able to sell the house before the lien has been in place long enough to be placed on the title.
If the taxes or contractor debt is still recorded as a lien against your property but hasn’t been recorded against the title yet, you might be able to sell the property before the lien is placed on the title.
In that case, you would avoid having to deal with the lien altogether. If the lien has already been recorded against the title, but there is a payment deadline before it will go on the title, you may be able to sell the house before that date.
A buyer can pay off the debt with their cash, and you can repay them with a promissory note.
Seller Can Pay Most But Not All Of The Lien And Still Sell
When you sell a house with a lien on the title, the lien holder is usually first in line to be paid from the proceeds from the sale. The amount of the lien is recorded against the title to the property and must be paid in full before you can get your money.
The lien holder can take as long as they want to collect the debt. You might not receive your money until months or years later. Try to negotiate with the lien holder to see if they would accept less than the full amount of the lien.
You might also be able to get the buyer to pay off the lien with a combination of cash and promissory notes.
Conclusion
If you’re trying to sell your house, you don’t want to discover that there’s a lien on the title. Unfortunately, liens are a common problem for real estate sellers.
They can be caused by a contractor who doesn’t get paid, a mortgage holder who doesn’t pay off their lien, or a prior owner who owes state taxes. Fortunately, there are ways to deal with a lien on the title.
if you need assistance with any issues involving the lien release process, then you may need to contact a local lawyer for help.