Can You Obtain a Mortgage With a Tax Deed?

Tax sales don't guarantee marketable titles.

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Delinquent real estate taxes can result in property seizures and sales by government taxing authorities. Public auctions allow parties to bid on, and purchase, seized real estate. The government transfers title to such properties by tax deeds. However, title problems can remain on properties after tax auctions, which makes lenders reluctant to make loans on properties purchased by tax deeds.

Marketable Title

Marketable title includes a property owner's ability to assure a new buyer, or mortgage lender, that he will not be faced with surprise title claims. A party who acquires property through a warranty deed receives marketable title. When a person transfers property with a warranty deed, she personally warrants, or guarantees, to the recipient, or grantee, free and clear title, and she must stand behind her guarantee after closing.

Tax Deeds

Tax liens generally take priority over other property liens. Therefore, tax sales, if conducted properly, extinguish other liens. However, tax deeds do not warrant title transfers, create marketable title or encourage title companies to issue title policies. For example, if a tax sale is flawed, liens may remain against properties after tax auctions. The tax deed does not guarantee clear title, or defend title challenges after tax sales.

Mortgage Requirements

Lenders generally require that property owners possess marketable title before extending loans against real estate. Typically, borrowers must provide title insurance policies to protect the lenders' monetary interests. Lenders usually do not lend against real estate when the owner holds a tax deed because the tax deed does not create marketable title, or enable issuance of a title policy.

Quiet Title Actions

Quiet title actions are court proceedings that ask judges to enter orders stating a grantee holds superior title to a property. Quiet title actions allow parties who believe they have remaining claims to state their cases in court. If no one appears in court, an order in favor of the grantee is signed, and marketable title is created. If parties challenge tax sales, the grantees and opposing parties litigate to determine their respective rights.