Title Insurance Basics for Home Buyers
You buy your dream house, move in, and then a contractor or taxing entity demands payment: the previous owner failed to pay his bills. Or when the previous owner bought the property, he neglected to get his estranged wife’s permission and signature on the sales contract and now she wants her share. You are now responsible for paying these debts; you could lose your home. The title insurance company’s job is to search through public records looking for these types of problems. You’re paying for this search, and if a title problem pops up later, the insurance company will cover your losses. Lenders require you to get title insurance to cover the loan amount to ensure the deal is legit and the seller has the right to sell the property. What is Title? Title is the evidence of land ownership and encompasses all the rights the owner enjoys. The deed is the vehicle used to transfer ownership interest from one person to another. Before the title can be transferred, the seller must provide evidence of marketable title ‒ title that is readily salable in a locality. Marketable title is not perfect title, nor is it necessarily free of all liens. A title search can provide evidence of marketable title. What is Title Insurance? Title insurance is a comprehensive indemnity contract under which a title insurance company will cover losses arising through title defects, liens or encumbrances. Title insurance in effect protects you against loss from occurrences that have already happened, such as a forged deed or undisclosed heirs. The title company will agree to defend your title in court against lawsuits that arise from defects covered in the policy. A title insurance policy won't guarantee to defeat claims against your title; the policy covers the cost of a legal defense and compensation if you are damaged due to covered situations. Contractor liens, tax liens, claims of ownership from family, and survey errors are some of the issues that could threaten the title. You pay a one-time premium, and coverage continues until the property is conveyed to a new owner. You’ll get a title binder or commitment that the insurance company will issue a policy. The insurer may require a new mortgage for the buyer, a limited survey to ensure there are no new encroachments, and the payoff of an existing mortgage (lien release). Abstract of Title An abstract of title is a condensed history of the title, a summary of all links in the chain of title plus any other matters of public record affecting the title. The preparer of the abstract certifies that all recorded matters relating to the real estate in question are included in the abstract. Then, an attorney examines it to assure that the chain of title is unbroken and clear. Title insurance policies are issued by the same companies that prepare abstracts of title. They check the same public records the abstractors searched to determine if they will risk insuring the title. Title Insurance Policies Under a typical title insurance policy, the title insurance company will compensate the insured for financial loss resulting from a title defect up to the face amount of the policy. The policy protects the insured only against title defects existing at the time of transfer of title. When you learn of an adverse claim against your title, contact the title insurance company. You are covered for legal expenses necessary to settle the claim. Standard title insurance would likely cover:
- Improperly recorded deed
- Forgery and impersonation
- Lack of competency, capacity or legal authority of a party
- Deed not joined by a necessary party (co-owner, heir, spouse, or business partner)
- Undisclosed (but recorded) prior mortgage or lien
- Easement or use restriction
- Erroneous or inadequate legal descriptions
- Utility easements
- Water rights or mineral rights limitations
- A legal road or easement
- Discovered encroachment that wasn’t corrected
- Old land grants
- Subdivision restrictions and covenants
- Owner's policy: For the protection of the new owner, it’s written for the amount the new owner paid for the property.
- Mortgagee's policy: Also called a lender's policy, it protects the lender against defects in the title to property pledged as security. The mortgagee's insurable interest is only the outstanding loan balance at any given time.
- Leasehold policy: Protects the tenant and/or lender against defects in the landlord’s title.
- Contract buyer's policy: This policy is issued when a contract for deed (land contract) is executed between vendor and vendee.