Title – What it is & how to hold it

If you’re new to real estate ownership or an experienced hand who wants to brush up, it’s a good idea to go over what “title” means and how buyers should hold it when they buy a house. If you’re a lender or real estate agent, you’ve probably heard all this before. Still, it never hurts to confirm what you already know or be reminded of what might have inched to the back of your brain.

First, a little clarification. I’ve referred to holding “title” in connection with buying a house. The same rules apply to buying commercial property, although non-residential property often is acquired in the name of a firm (i.e., partnership, corporation, limited liability company). That’s a separate topic we’ll save for later.

For now, let’s think residential.

Title companies who prepare deeds and insure ownership always ask how buyers want to take title. But that’s actually the second issue. The first is what sort of title are the buyers getting. Do I mean there’s more than one kind of title? Yes, although in residential transactions, owning less than what might be called full ownership is rare.

Let’s look a little deeper.

In real estate, “title” to property means ownership of a specified interest in that property. The ownership interest can take several forms, including “fee simple” (full or outright ownership), “life estate” (ownership limited to the length of someone’s life), and “leasehold” (long-term tenant’s rights under a lease for a specified period, often 30 or more years). It’s unusual for buyers of houses to acquire less than full or outright ownership or to share ownership with somebody else. That’s because most buyers want total control and because their lenders require it. How many lenders would be willing to lend money to buy a house if the buyer’s ownership ends when the buyer’s 80-year-old grandmother dies? Or when the buyer dies?

But, assuming buyers are acquiring full ownership (as mentioned above, the legal term is “fee simple”), do lenders care how title is held? Probably not, so long as the buyers are creditworthy and qualify for the loan. If one of a pair of buyers has credit problems, though, lenders may require that only the qualified buyer hold title. This is because regulators (or upstream purchasers of loans in the secondary market) don’t want a person with bad credit on the loan. There are reasons for this too, having to do with loans being packaged and sold in the form of mortgage-backed securities (MBS). Unless you’ve been hiding under a rock during the recent economic meltdown, you’ve undoubtedly heard of MBS. In any event, who holds title may be credit-driven instead of buyer’s preference.

Does who holds title (whose names are on the deed) really matter? Read on and decide for yourself.

As mentioned above, an owner holds “title” to whatever interest in the real estate is being acquired. Usually, that interest is “fee simple”. Full or “fee simple” ownership can take several forms if the real estate is co-owned (tenancy in common, joint tenancy with the right of survivorship, tenancy by the entireties), each form having different attributes and consequences.

Ownership as “tenants by the entireties” is reserved for married couples, so let’s save that for last.

First then, “tenants in common” and “joint tenants with right of survivorship”. Simply put, if two people own as tenants in common and one of them dies, the surviving co-owner does not inherit the decedent’s share. Instead, that share goes to the decedent’s heirs (among whom could be the co-owner but not necessarily). In contrast, if two people own as joint tenants with right of survivorship, on the death of one co-owner (sometimes co-owners are called “co-tenants”) the surviving co-owner becomes the owner of the decedent’s share. Casual friends who are co-owners may opt to own as tenants in common because each prefers for his or her share to end up in the hands of his or her heirs. On the other hand, co-owners who have more than a casual relationship (family members, domestic partners) may prefer the survivor to take it all. As mentioned above, typically lenders don’t express a preference how title is held unless the creditworthiness of one of the co-owners rears its head.

Now, “tenants by the entireties”. Unlike the other two forms of co-ownership, tenants by the entireties must be spouses. As with joint tenants, the surviving spouse inherits from the deceased spouse automatically. However, tenancies by the entireties provide other protections of marital property from the folly or misfortune of either spouse. For example, except for the lien of taxes filed by the IRS, in Indiana the debts of one spouse will not become a lien against property owned as husband and wife. This is because in Indiana a magic shield ring-fences spousal property. Conversely, neither tenants in common nor joint tenants enjoy similar protections. Most deeds conveying real estate to spouses refer to them as “husband and wife” instead of “tenants by the entireties”. But both terms mean the same thing.

What about states in which so-called domestic partners are allowed to marry? Are those domestic partners allowed to own real estate as tenants by the entireties? Probably so in those states, although a real estate lawyer in the particular state should be consulted to be sure. Having said that, I’m unaware of any Indiana court case which has addressed this issue. So, for a same-sex couple legally married in another state to expect Indiana (which has not blessed same-sex marriage) to honor tenancy by the entirety rules for Indiana property is risky.

So, boiling all this down, here’s where we end up. In a typical house sale, “title” is transferred by the seller to the buyer when the seller signs the deed and the deed is given (“delivered”) to the buyer. Deeds are then filed in the county Recorder’s office. In turn, the “title” is insured by a title insurance policy. The official owner is the person whose name is on the deed.

Let’s close with a practice tip. Say two people (married or not) want to co-own a house but one of them doesn’t qualify for the loan because of credit problems. Is there still a way for them to co-own? Yes. At the closing, the creditworthy person can take title alone and sign all the loan papers. Then, after closing, the creditworthy buyer can sign a deed to the two of them (which designates how title is to be held: tenants in common, joint tenants with right of survivorship, or tenants by the entireties) then record it. Most lenders don’t have a problem with this, but before doing it be sure to check.

And don’t forget to tell the title insurance company so it can change the name of its insured to the creditworthy buyer and his or her co-owner.

- Morrie Erickson