Why lenders require a clean title

Lenders underwrite real estate loans expecting their mortgage lien will be enforceable and first in priority. A recorded encumbrance, unresolved claim, or defect in the chain of ownership can reduce or eliminate that security and raise the lender’s risk. That’s why lenders typically require a title search and a lender’s title insurance policy before closing—both to identify defects and protect against covered surprises after funding (Consumer Financial Protection Bureau: https://www.consumerfinance.gov/).

In my practice as a loan and closing advisor, I’ve seen two common outcomes when a title is not clean: the lender delays or denies funding until curative steps are complete, or the seller/buyer negotiates an escrow holdback while the issue is resolved. Both are avoidable when parties know how title problems are found and fixed early.

Common title defects that block financing

  • Recorded liens: unpaid mortgages, home-equity loans, tax liens, and mechanic’s liens. Tax liens from federal or state agencies are especially problematic because they generally have priority over subsequent mortgages (IRS: https://www.irs.gov/).
  • Chain-of-title gaps: missing deeds, ambiguous transfers, or heirs not properly quitclaimed can create questions about who actually owns the property.
  • Clerical errors: misspelled names, incorrect legal descriptions, or recording mistakes in public records.
  • Fraud or forgery: forged signatures or fraudulent conveyances that cloud ownership.
  • Unreleased mortgages or satisfactions: the previous lender’s mortgage not showing a recorded release or reconveyance.

Each defect has different remedies and timelines. Lenders and title companies categorize them by severity and solvability; many title commitments list exceptions that the title company will not insure unless cured or covered by an exception removal.

How the title search and title insurance fit together

A typical flow before closing:

  1. Title search: a title company or attorney examines county and state public records to identify liens, judgments, easements, and ownership history.
  2. Title commitment: the title company issues a commitment detailing exceptions and conditions to issuing a lender’s and owner’s policy.
  3. Curative requirements: the commitment will list what needs to be cleared (e.g., payoffs, releases, affidavits).
  4. Title insurance issuance at closing: the lender usually requires a lender’s policy; buyers often purchase an owner’s policy for additional protection.

Title insurance does not prevent title problems; it protects against covered losses after a problem arises. Read the policy exclusions carefully—some issues must be cured or expressly insured by endorsement to satisfy a lender (CFPB; HUD: https://www.hud.gov/).

For further reading on how title insurance protects both parties, see our article: How Title Insurance Protects Mortgage Lenders and Buyers.

Step-by-step title curative actions (practical checklist)

Below is a practical order of operations used by title professionals and lenders when a defect is identified:

1) Identify the problem

  • Use the title commitment and a recorded-document review to determine exact file numbers, parties, and dates.

2) Get payoff or release documentation

  • For mortgages and loans, request a payoff statement and a recorded satisfaction or reconveyance after payoff. Confirm the recording reference numbers.

3) Pay or subordinate liens as appropriate

  • Tax liens and judgment liens normally must be paid or subordinated. For federal tax liens, the IRS has procedures for withdrawal, subordination, or lien release when taxes are paid (IRS guidance: https://www.irs.gov/).

4) Obtain corrective documents

  • Correction deed, quitclaim deed, or affidavit of heirship can fix clerical errors or confirm chain of ownership. These must be properly executed and recorded.

5) Obtain lien releases or mechanic’s lien waivers

  • Request lien releases from creditors or conditional waivers from contractors when work has been paid.

6) Seek a judicial remedy if needed

  • Quiet title action: filing suit to resolve disputed ownership or remove stale claims. This is slower and involves court costs; expect months in many jurisdictions.

7) Ask for a title endorsement or indemnity

  • Sometimes title underwriters will issue an endorsement or a curative indemnity policy that protects the lender while a specific problem is resolved.

8) Confirm recordation and update the title commitment

  • The title company must see the recorded instruments and update the commitment prior to closing.

Typical timelines and costs

  • Simple clerical corrections, releases, and payoff recordings: 1–4 weeks (dependent on local recorder backlog).
  • Mechanic’s lien resolution or creditor payoff negotiation: 2–8 weeks.
  • Quiet title litigation: 3–12+ months and can cost several thousand dollars in attorney fees and court costs.
  • Title insurance endorsements or curative underwriting: fees vary by underwriter and state but are typically a fraction of the title policy premium.

Costs depend on the defect and who pays: sellers commonly clear title defects pre-listing; buyers may negotiate seller-paid curatives or price adjustments. Lenders usually will not waive monetary liens unless they are subordinated or insured by the title underwriter.

When a lender may accept alternatives

Lenders sometimes accept temporary alternatives to immediate curative action when the risk is low and covered by title insurance or escrow holdbacks. Examples:

  • Escrow holdback: a portion of proceeds is held until a recorded release appears. Requires written lender approval and often a time cap.
  • Title endorsement or escrowed funds: the underwriter issues a limited endorsement to allow closing while curing is finalized.

These alternatives are case-specific and generally more common for minor clerical issues than for tax liens or unresolved ownership claims.

Quiet title: when to use it

A quiet title action is a court procedure to establish a party’s title against competing claims. Use cases include:

  • Disputed heirship after an estate transfer
  • Adverse possession claims where possession time may be less certain
  • Chain-of-title gaps that cannot be fixed by deed or affidavit

Quiet title provides legal finality, but lenders view it as time-consuming and expensive. Compare this route with negotiated releases or indemnity endorsements before committing to litigation. For an overview of quiet title steps, see: Quiet Title Action.

Preventive steps for sellers and buyers

  • Sellers: order a preliminary title report before listing; resolve known liens and get release recordings done.
  • Buyers: review the title commitment early; insist on a lender’s policy and consider purchasing an owner’s policy.
  • Both parties: collect payoff statements, lien releases, and recorded satisfactions, and provide them to escrow or title counsel promptly.

Also see our related resource on title problems that can block a mortgage closing: Title Issues That Can Block a Mortgage Closing.

Professional tips from practice

  • Document everything: lenders and underwriters rely on recorded instruments and chain-of-custody of payoff funds.
  • Start early: order the title search as soon as the purchase agreement is signed.
  • If a prior mortgage shows no recorded release, contact the prior lender for a reconveyance or recorded satisfaction—don’t assume it’s informal.
  • For inherited property, obtain probate or an affidavit of heirship to remove future disputes.

In my practice, proactively ordering a corrected deed or lien release often shaves weeks off closing delays and reduces legal costs.

Limitations and legal disclaimer

This article is educational and does not substitute for legal advice. Title law varies by state and facts matter. For specific curative strategies, consult a licensed real estate attorney or a title professional in the property’s recording jurisdiction. The Consumer Financial Protection Bureau, the U.S. Department of Housing and Urban Development, and the IRS offer authoritative public guidance on title and lien priorities: (CFPB) https://www.consumerfinance.gov/, (HUD) https://www.hud.gov/, (IRS) https://www.irs.gov/.

Sources and further reading

Professional Disclaimer: This content is for informational purposes only and does not constitute legal, tax, or financial advice. Consult appropriate professionals for guidance tailored to your situation.