What is Title Insurance?
Title insurance protects the buyer and the lender against outstanding claims against the property or mistakes on the title. It consists of two things: a search to confirm that the current title is correct and that no one else has any claim to the property and insurance to cover costs should anyone challenge ownership of the property. Title insurance can only be purchased at closing.
Although the chances are low that there will be a rightful claim, the cost of the insurance is low compared to the possibility of losing the property to a third party. Title insurance will cover the policyholder’s attorney’s fees and court expenses and/or any financial loss caused by problems with the title, subject to the policy’s terms and conditions. Unlike traditional insurance, title insurance protects against losses from events that occur before closing. It is paid with a one time premium.
What is a Title Search?
When title insurance is purchased, a title search is initiated. The title insurance company will thoroughly check public records to document ownership of the property and look for any outstanding claims. Wills, deeds, and trusts are searched, tracing the history of the property or “chain of title” through ownership. The company will verify that all mortgages, liens, and taxes have been paid in full and all easements are documented. They will issue a title report with any potential issues once the search is complete.
More than one third of all title searches reveal a problem, according to the American Land Title Association (ALTA), the largest trade association for title-insurance providers. Some issues, like unpaid taxes, are easily solved by deducting the payment from the proceeds of the sale. Others, like survey issues, can require time and effort to resolve. The title company will work with the sellers to solve any problems so that closing is not delayed.
Who Needs Title Insurance?
Lender: Title insurance is almost universally required by all lenders. It protects the value of the money lent against a claim of ownership on the property. This policy only protects the lender’s interests. The policy amount will decrease as the amount of the loan decreases but will remain in place until either the mortgage has been repaid or the property is sold.
Buyers: A version of title insurance can be purchased for the length of ownership of the property, not just the mortgage. This type of insurance protects against future problems, like removing a utility company’s easement.
Buying Title Insurance
Local custom can dictate whether the buyer or seller pays for the lender’s title insurance. Although the seller, the lender, or the realtor can recommend a company, the borrower can choose any provider. It is also possible to save on the premium if the property previously had title insurance. Separate owner’s policies can also cost much less if bundled at closing.
As when choosing any service or company, check with friends, family and industry professionals for referrals. It is also recommended that buyers compare prices and the quality of service when choosing a title insurance company. Be sure to check what’s included in the policy, it will differ depending on the company.
Prices are regulated in many states, although rates are typically higher with more expensive homes. The quality of the search and fees for additional services, such as a wire transfer, can vary. Ask what services and fees are included, if discounts are available, read the fine print.
What does Title Insurance Cover?
Unlike most insurance that protects against future problems, traditional title insurance only offers protection from past events. An additional owner’s policy can be issued for the value of the property and provides protection for as long as the buyer or the buyer’s heirs own the property.
Here is a list of common title problems:
- Unpaid Mortgages
- Unpaid Taxes, including estate, inheritance, property, income or gift
- Forged deeds, wills or other documents
- Undisclosed heirs
- Unprobated wills
- Encroachments or boundary line disputes
- Errors in public records
- Mistakes in legal documents
- Spousal claims
- Child support liens
- Missed easements
The title insurance policy has several sections, including covered risks, exclusions, specific information about the policy such as the date and amount of insurance and any exceptions found during the title search. The policy may also detail any conditions, including the details of the relationship between the insured and the title company.