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Buying a house includes many moving pieces. Not only must you know how much a home is worth, but you must know the title is clear. The title shows the chain of ownership and any liens the property has.
A title contingency can protect your investment if there isn’t a clear title. Here’s everything you must know.
What is a Title Contingency?
When a property transfers hands, the title changes ownership too. Unlike other debts, though, if there is a lien on the title, it transfers with the property, not the person. If you take ownership of a property with a lien on it, you are responsible for the lien.
A title contingency provides time to complete the title search to ensure the property is free of any liens except the current owner’s mortgage. If the title search shows any liens, you can back out of the sale with your earnest money in hand.
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How Do Title Contingencies Work?
Title contingencies give you more time to back out of the contract. Once you sign the contract and give it to your lender, they will order a title search from the title company. This can take a week or longer, so make sure it’s ordered right away.
When the title search comes back, the lender will let you know if there are liens on the property.
If there are, you can talk to the seller and ask them to settle, or you can back out of the sale. Make sure you back out before the contingency expires, or you risk losing your earnest money, though.
Title contingencies also protect you against any forgery or fraud that may have occurred on the title that never got resolved.
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Title Contingency Example: The Clause in Action
You sign a contract to buy a house and add a title contingency because you aren’t sure if the title is clear.
The seller made some comments about a bankruptcy and other debts, so you want to be sure there aren’t any liens.
The title search comes back and shows that the seller has two liens on the property for a total of $5,000.
You ask the seller to clear up the liens and show proof that they are clear. The seller doesn’t have the funds to clear up the liens, so you back out of the sale and get your earnest money back.
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What Does Waiving Title Contingency Mean?
Waiving title contingency means you don’t ask for the extra time to ensure there is a clear title.
Only do this when you’re certain the home is clear of liens, or you have a financing contingency.
Lenders won’t approve a loan if there isn’t a clear title, which means you can’t get financing.
How Common Are Title Contingencies?
Title contingencies aren’t the most popular contingency, but they do rank up there. Financing, inspection, and house sale contingencies are the top three contingencies buyers usually want. If you don’t have a financing contingency, though, a title contingency is important.
Like I said above, a financing contingency can cover you if the title isn’t clear since a lender won’t provide funds on an unclear title.
But, if you don’t ask for a financing contingency (they make some sellers nervous), a title contingency is a good second choice.
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When Should You Use a Title Contingency?
Anyone can use the title contingency. You won’t know for certain a title is clear of liens or defects until the title company performs the search.
At the very least, if you don’t ask for a financing contingency, use the title contingency in its place.
How Are Clear Titles and Title Contingencies Different?
When you buy a home, you want a clear title – without a clear title, you’re taking on debts of the previous owner.
A title contingency provides time to get a clear title or to find out if there is a clear title. If there isn’t, you can re-negotiate with the seller and hold off on the sale until he/she provides proof they cleared up the liens.
Bottom Line: What Is a Title Contingency?
A title contingency prevents you from buying a home with liens. Any liens on a property become the new owner’s responsibility even though they have nothing to do with you.
If you don’t have a financing contingency, strongly consider the title contingency to protect your investment.