Title insurance is a protection for a purchaser of property and a mortgage lender against defects or problems with a title when an individual is purchasing a home. There are two main types of title insurance policies which are typically purchased.
The first type of title insurance is the owner’s policy. This policy protects the new owner.
The second type of title insurance is the lender’s policy. This policy protects the lender.
The purpose of the title insurance is to protect both the purchaser and the lender against a potential loss or liability if there is a mistake or issue in the documentation or the process of title transfer for the property.
Obtaining title insurance is a standard step in the majority of real estate transactions. There are different types of title insurance available to protect the purchaser and the lender from litigation if the seller does not, in fact, have free and clear ownership of the property.
The majority of lenders require that the buyer obtain title insurance. The buyer only pays for the title insurance one time and it remains in effect until they sell the property or refinance the property.
What is a Title Search?
A title search is conducted through public records. These public records are searched in order to find all documents that relate to the title.
The documents that are found are then examined and used to develop the history of the ownership of the property. A title search can be used to discover the following information:
- The current status of ownership;
- The current owner; and
- Limitations of the owner’s property rights includes:
Once a title search is complete, that information is then used to determine that amount of title insurance which is needed.
What is the Title Insurance Process?
Prior to the buyer obtaining title insurance, the first step to purchasing a home is to ensure that the home or property is legally available to be sold and purchased. Title searches are currently conducted as part of a standard real estate transaction in order to help prevent any issues with the purchase.
The seller is required to have free and clear ownership of the property. This means the seller can rightfully and legally transfer full ownership of the property to the buyer.
The buyer’s attorney or the real estate agent’s attorney typically conducts the title search. A title search generally involves reviewing public property records to ensure that there are no errors in the title to the property.
A title search is also conducted to ensure there are no other potential issues, which may include:
- Undisclosed heirs;
- Omissions on the property deed;
- Unknown liens on the property; or
- Any fraud related to the property deed.
If a title search comes up clean, this means that it has been determined that the seller has the legal right to sell and transfer ownership to the buyer.
What is a Defective Title?
Having a valid title to a property means that the owner has the exclusive legal right to own and use the piece of property. In order for a title to be valid, the title must be free of defects.
If the title is defective, the seller of the property may be required to clear title, or to remedy the title defects, prior to the seller completing the sale of the property to a buyer.
There are several different types of title defects that exist. These include:
- A superior claim to ownership of the property by another individual or entity;
- A mistake in the description of the property in the deed;
- Another type of mistake in the deed;
- The failure to record the deed; and
- The property is subject to a mortgage.
A superior claim to ownership of the property by another individual or entity occurs in cases where a creditor, to whom an owner owes a money judgment, may have a superior claim to someone who is seeking to purchase the property. The creditor protects their interest in the property by filing a lien in the county land recording office. The potential seller must pay off, or satisfy, this lien, prior to a buyer being able to purchase the property.
In some cases, there is a mistake in the description of the property in the deed. The deed must accurately describe the property’s boundaries. If the deed does not sufficiently identify the piece of property or if it inaccurately describes the piece of property, then there is a defect in the title.
Another type of mistake in the deed occurs when either an individual who granted the property to the current owner, or the current owner themselves failed to sign the feed. It also occurs if they failed to date the deed.
When an individual files a copy of a deed to their property with the county land recording office, the law regards this filing as having given notice to the entire world of their ownership interest. This is called constructive notice. This means that even though the filing does not provide actual notice to a specific individual, the law deems or construes the notice to be actual.
If the property owner took out a second mortgage on the property and failed to record that mortgage, the title is defective. While a buyer is able to assume a mortgage, meaning the buyer agrees to purchase the property and pay off that mortgage, this buyer is not required to do so.
How do I Secure and Pay for a Title Insurance Policy?
A buyer typically does not conduct a title search or find title insurance. The attorney or real estate agent the individual hires should initiate the process.
In most cases, the attorney’s office will handle the title search and either the attorney or the real estate agent will choose the title insurer. The cost of title insurance varies and is typically paid as a one-time fee as part of the buyer’s closing costs.
The cost of title insurance may range from a few hundred dollars to a few thousand dollars. If an issue arises, the title insurance covers the legal expenses for investigating a claim, litigation, or settling an adverse claim against the title.
Why Do I Need Title Insurance?
Title insurance protects the purchaser from potential property disputes. In general, a title search that is done thoroughly determines the current and past status of the real estate the buyer is attempting to purchase.
There is, however, always a possibility that a document related to the property was forged or a missing heir comes forward and claims the real estate is theirs. In these types of cases, title insurance is necessary to help deter any major financial losses.
If there are issues with a title, it may mean a lengthy legal battle for the property buyer. While a title search should be able to discover any issues with the title, there are some cases of fraud where or cases where there is a pending lawsuit that is tied to the property.
In these instances, it may be possible that the new homeowner will lose the property along with any and all money that was put towards the purchase. Ultimately, title insurance is intended to protect the lender, not the new homeowner, as the lender will own the majority of the home until the mortgage is paid off in full.
Do I Need a Lawyer?
Yes, it is essential to have the assistance of a real estate attorney for any title insurance issues you may be having. Purchase of real estate is a significant investment, likely the largest you will make in your lifetime, and it is important to protect yourself against liability. Your attorney can conduct and review and title search, examine your title insurance policy, and assist you with ensuring that the transaction is completed legally and successfully.