What is Title Insurance?

Types of Title Insurance

Owner’s vs. Lender’s Title Insurance Policies

Why Title Insurance?

What does Title Insurance Protect You Against?

What does Title Insurance Generally Not Protect You Against?

Behind the Scenes: Procedure for Obtaining Title Insurance

Premiums

Importance in Choosing Your Title Insurance Agent

 

What is Title Insurance?

Title Insurance is a policy of protection against loss arising out of a claim against your ownership of a piece of real estate. When purchasing real estate, you do not receive the land itself, but legal title to the property which may be limited by the rights and claims of others. Title problems can limit your use and enjoyment of your property, can cause financial loss, and can threaten the security interest held by your mortgage lender. If a claim is made against your property, title insurance will (depending upon the terms and conditions of your policy) provide for your legal defense, pay court costs, pay any related fees, and should the claim against your property prove valid, reimburse you for your actual loss up to the face amount of the policy.

 

Types of Title Insurance:

There are two main types of title insurance policies: owner’s policy and loan policy. As the names suggest, an owner’s policy covers the owner of the real estate and a loan policy covers the lender for a specific loan made on the real estate.

 

Owner’s vs. Lender’s Title Insurance Policies:

An owner’s policy is designed to protect the owner against title defects.  It is usually issued for the purchase amount of the property, but can be issued for more [for example, the purchase price plus the value of the subsequent construction].  A loan policy insures that a financial institution has a valid, enforceable lien on the property and is usually issued for the face amount of the loan. Only having a loan policy may provide an owner some protection, but that protection is far from complete. Claims often arise that do not jeopardize the lender’s interest, but may, in fact, cause a great deal of loss to the owner of the real estate. Also, the policies are usually for two difference amounts. The larger the down payment, the greater the disparity between the amount of each policy coverage, and as a loan is closer to being paid off, the disparity between the interest of the lender in the real estate and the interest of the owner increases. Cases do arise where it is cheaper for the insurance company to pay the loan off, rather than to defend an adverse claim.  And once a loan is paid off, the loan policy provides no protection for the owner.

 

Why Title Insurance?

When you are buying real estate, you can see the land, the buildings, the landscaping, the view, the traffic, and other factors that contribute to the reason you decide to purchase a piece of real estate. However, a very important thing you cannot see when buying real estate is the title. A title is the evidence of right that a person has to the ownership and possession of land. The quality of any title is not an absolute thing. It’s a matter of opinion. Experts in the area of real estate may even differ. Ultimately, it could be a question for a court to decide the true owner of title. Title insurance should be obtained for two reasons. First, one element of title insurance is the elimination of risk before insuring (i.e., to ascertain and correct title problems before the purchase). Second, title insurance will protect you against loss due to title defects or adverse title claims, including attorney fees, as to matters covered by the policy.

 

What does Title Insurance Protect You Against?

-False impersonation of the true owner of the property.

-Forged instruments (deeds, mortgages, releases, certificates of satisfaction, and wills) and forged signatures thereon.

-Undisclosed or missing heirs.

-Deeds not properly recorded.

-Mistakes in recording legal documents.

-Misinterpretation of Wills.

-Deeds by persons of unsound mind (incompetent).

-Deeds by minors.

-Deeds by persons who claim to be single, but are, in fact, married.

-Instruments executed under invalid or expired power of attorney.

-Fraud.

-Liens for unpaid taxes (estate, inheritance, income or gift taxes).

-Unreleased prior mortgages.

-Improper court proceedings (such as where land is transferred through probate or divorce proceedings and mistakes are made).

-Notary or witness acknowledgments which are forgeries.

 

What does Title Insurance Generally Not Protect You Against?

-Things that occur after the date of the policy (such as a deed with a legal description that erroneously includes all or part of the insured premises but is recorded after the date of the policy).

-Defects that may be disclosed by a proper inspection and/or survey of the property that are not shown by the public records (such as parties in possession, boundary line disputes, overlaps, encroachments and any other matter).

-Easements, or claims of easements, not shown by the public record.

-Liens imposed by law which are not shown by the public records.

-Taxes not shown by the public records.

-Property taxes and assessments after a specified date.

-Matters specifically set out as exceptions to coverage in the policy.

 

Behind the Scenes: Procedure for Obtaining Title Insurance

There are five different steps to obtaining a policy of title insurance. The first step is to place an order for title insurance. [This step is often completed by the financial institution or real estate broker on behalf of the owner, seller, and/or buyer.]  Upon receiving an order for title insurance, the title company will perform a title search on the proposed insured property. For this second step, the title company will need a legal description of the property and the names and marital status of the owners, sellers, and/or buyers. A title search is an examination of the historical records on a piece of property. It includes examining deeds, mortgages, liens, affidavits, taxes, and other legal documents that have been filed for record. It also includes examining any liens or other documents filed against or involving persons in the chain of title (current owners, prior owners, and buyers) that may affect the legal title of the property. Third, the title search is sent to the title agent who drafts a title commitment (i.e., a binder). The commitment sets out the legal description of the property being insured, the amounts of coverage, the types of coverage, the requirements to be met, and the exclusions to the policy. Fourth, a closing is held. A closing is sometimes conducted by the financial institution and sometimes by the title company (depending upon the type of loan, if any, and the services offered by a particular financial institution). The closing agent assists in meeting the requirements made in the commitment and handles the distribution of proceeds and payments of debts incurred in the transaction, such as survey fees, appraisal fees, termite inspection, pro-ration of taxes, revenue stamps, title insurance premiums, closing costs, filing fees, and loan fees. It is at the closing that the signing of all documents (deeds, notes, mortgages, etcetera…) occurs. The last step is a title search from the date of the commitment to present to determine that all requirements have been met. If all requirements have been met, then the final policy is issued. If all requirements have not been met, then there may be a delay in issuing the final policy while that requirement is met (or the final policy can be issued with the unsatisfied requirement made an exception in the policy).

 

Premiums:

Title insurance involves only a one-time premium. For this you get an owner’s policy that is effective for as long as you own the property or a loan policy that is effective for the life of the insured mortgage. There are no annual or renewal premiums. The cost of title insurance is usually based on the types of policies being issued and the face amount of coverage for each policy. However, the increased cost of adding an owner’s policy to an order for a loan policy is usually minimal (often somewhere between $75 to $175 for a medium-cost residential purchase).

 

Importance in Choosing Your Title Insurance Agent:

Choosing your agent is a very important decision. Since the determination of what constitutes good title to a piece of real estate is an opinion, you want a qualified agent. First, I would suggest using agents who are attorneys. The cost of the insurance is usually the same or very close, and an attorney has the knowledge necessary to make a really well informed opinion. Second, use a title company that conducts its searches by use of a licensed title plant. Some companies rely on courthouse grantor-grantee searches which are legal, but are not as accurate as an index search based on a licensed abstract plant. Third, use a company which employs licensed abstractors. Some companies completely use only lightly trained personnel to perform their searches. A quality title opinion cannot be rendered unless there has been a quality search.  And finally, inquire into a title company's reputation for reliability and accuracy.  Ask real estate brokers and/or bank loan officers who they would recommend (or who they would avoid), and why they make that recommendation.  The costs between using different title insurance agents is usually comparable so there is no reason not to use an agent with a good reputation.

It is important to keep in mind that the risk of many title defects or adverse claims can be eliminated. Choosing a quality agent helps to ensure that you eliminate these risks. It will also help ensure that in the future when you go to refinance or sell the insured property, that the sale or refinance will go smoothly.