What is title insurance?
Most people have never heard of title insurance until it is time to buy their first home. When they sign the contract, they may notice the reference to title insurance and give their REALTOR® a blank stare as he explains it. Then, when they see the premium among the long list of fees and charges to pay at closing, they might start asking why they need it and if it is really necessary?
These are all great questions every homebuyer should be asking.
What is title insurance?
Let’s take a look at what title insurance is first, then explain in more detail why it’s so important for your real estate transaction.
Title insurance is a unique form of insurance because it protects you against ownership claims against your property. Unlike other types of insurance, your title insurance policy, for a onetime premium paid at closing, provides protection to you and your heirs for as long as you own your house.
Also, unlike other types of insurance, title insurance protects you from events that happened in the past: a forgery, forgotten heir, or other claims by people or entities who may truly (but unknown to you) have a right to your property.
Is title insurance optional?
Many people think that since it’s protecting against events in the past, title insurance is something they can choose to forgo. After all, the title company did a search of the property already. Why not just review the commitment and forgo the policy?
It’s a common misconception that a title search will uncover every possible defect in title. Title searches only discover events and documents of public record, so anything done illegally or without proper documentation may not be known until sometime in the future.
Remember, even the most thorough title search is prone to human error. And even if the title company has done their job perfectly, there may have been an error in recording or at some other step in any previous transaction including the property.
Lenders do not consider title insurance optional. In fact, nearly all institutional lenders insist on having their own policy separate from the owner’s policy. If it’s important for their partial investment in the property, it is even more important for the homeowner to be protected for the full value of the home.
The lender’s policy protects the lender for the amount of the loan, and for the validity and position of their lien. Only an owner’s policy fully protects the buyer against title problems that arise after the home is purchased.
How does title insurance work?
The title company does a careful search and examination of all recorded documents to determine who currently owns the property, whether it has been properly deeded, and what other parties may have an interest or claim in the property (lien holders or companies who may have an easement over your property, for example).
This information is disclosed in the title commitment under “exceptions,” so you can review all information prior to taking ownership and make a fully informed decision to purchase the property.
The title commitment also lists requirements that must be met to clear any defects in title prior to or at the closing. Once the closing takes place, the title company records the documents and issues the final title policy, which you should keep in a safe place with other legal documents.
Should a title problem arise at any future date, the title company will stand behind the policy holder, both monetarily and with legal defense if necessary, to pay claims and defend their title to the property.
Why do I need title insurance?
The American Land Title Association reports that 36% of all real estate transactions have a defect in title. Title insurance protects against loss or damage against any future claims people may have against your ownership of the property.
There are potentially hundreds of ways title to your property can be compromised. Even if you don’t lose your property altogether, certain title defects can make it impossible for you to sell or even give away your property. Here are some of the possible title defects covered by title insurance:
- Forged deeds, releases, or wills.
- False impersonation of the true owner of a property.
- Documents executed under invalid or expired powers of attorney.
- Misinterpretations of wills, or discovery of a later will after the first will goes through probate.
- Deeds by minors, by someone of unsound mind, or by someone married representing themselves as single.
- Mistakes in recording, or deeds recorded but improperly indexed and therefore not discoverable by a title search.
- Undisclosed divorce by someone who conveys title of a deceased former spouse.
- Deed to or from a corporation before incorporation or after loss of a corporate charter.
- Claims resulting from the use of aliases or fictitious names by someone earlier in the chain of title.
- Liens for unpaid estate, inheritance, income, or gift taxes.
- Disputed or fraudulently obtained release of a mortgage document.
- A misapplied tax payment.
- Undisclosed heirs who surface years or decades later.
The American Land Title Association website lists detailed examples of three common title problems that resulted in claims, including fraud and forgery; missing heirs; and conflicting wills with a 20-year-old unrecorded deed — all issues that would be covered by an owner’s title insurance policy. Visit Home Closing 101 for more information.