What Is a Certificate of Title?
A certificate of title is an official state or municipal-issued document that identifies the owner(s) of personal or real property. A certificate of title provides documentary evidence of the right of ownership, mainly for real estate but which may also apply to a business, boat, or vehicle, among others.
When issued for real property—such as land or a house—by a title insurance company, the certificate of title is a statement of opinion on the status of the title, based on a thorough examination, or title search, of specified public records. The title thus embodies the right or evidence of the right of ownership of real property.
- A certificate of title is a document that officially grants ownership to the holder of the property referenced by that title.
- Certificates of title are often transferred from seller to buyer in real estate and vehicle transactions.
- The certificate by itself is not a guarantee of a free and clear title, and a title search must be completed before settling large transactions.
How Certificates of Title Work
Certificates of title can apply to any type of property that has a title, particularly real estate and vehicles. The owner can assume title once their contractual and financial obligations are cleared.
Information on the certificate of title includes the name of the owner and information about the property. Whenever real property is sold, the title is transferred to the new buyer. All such property that is sold or traded must be free of liens and other debts before the property can be transferred to another party. In other words, the title must be a clear title, which is when there are no creditors claiming ownership due to extending credit to a borrower, and that the owner has an undisputed claim to the property or asset. If the title is not clear, it might be considered a bad title because there could be outstanding liens against the property, back taxes owed, or unresolved building code violations.
It's important that a title search is performed by a title company to ensure that there are no liens, back taxes, or issues with the title that would prevent the sale of the asset. For all involved parties to have an accurate assessment of ownership, public record-keeping is necessary as it provides legal and public notice regarding an entity’s interest in a specific piece of property. This public paper trail allows parties to protect their interests against any third-party claims. Once clear title has been established the previous owner passes the certificate of title onto to new owner.
Liens and outstanding loans are identified on the certificate of title for a vehicle.
Non-Real Estate Certificates of Title
During the sale of a property, the owner must guarantee to the buyer that the title being conveyed is free and clear of anyone else’s claims. A part of that process is demonstrating proof of ownership through means of a certificate of title. The certificate of title, therefore, is a statement of opinion that a title company or attorney believes the property is owned free and clear—based on researching available public records. Public records normally list any encumbrances on the property, such as liens or easements.
Certificates of title are also issued for vehicles—automobiles, buses, motorcycles, motor homes, trailers and trucks, aircraft, and watercraft, and are often called pink slips. These are issued by a designated state agency to identify the owner of the vehicle in question. Any liens or outstanding loans are identified on the certificate of title. A vehicle's certificate of title will contain the owner's name and address, as well as the vehicle identification number (VIN).
A lender will often hold the title until the obligation has been satisfied, at which point the lien is released and the certificate of title will be sent to the owner. Take automobile loans, for example. If you purchase a new SUV, and the dealer finances your loan, it will hold the title until you make your last payment. The title is transferred into your name once the loan is paid off completely.
Title and Guarantee of Ownership
A certificate of title is not a guarantee of a free and clear title. There may be unrecorded encumbrances and liens, incorrectly recorded information, or fraudulent activity that are simply unknown. For such reasons, title insurance is purchased to protect the seller from any claims arising from prior or unknown unrecorded or fraudulent activity. Title companies provide certificates of title to lenders that require these documents prior to approving mortgage loans.
Certificate of Title vs. Deed
Both a certificate of title and a deed are written documents that are used to provide proof of ownership. But the two have inherent differences. While the certificate of title is an opinion of status and doesn't guarantee ownership, the deed is a document used when there is a transfer of property from a seller to a buyer. By issuing a deed, the seller transfers the interest to the buyer, also known as the grantor. The deed may also outline detailed information about the property.