Title insurance protects homeowners against issues concerning the ownership of their property. A clean and clear title gives you ownership of the property. This is important not only to you as the buyer, but for your lender as well, since they want to know that the seller really owns the property and the loan is going to result in a legitimate transaction. In short, obtaining title insurance is one method of securing your right to the use and enjoyment of your property.
Common Title Issues
Some title issues involve the entire house, and others may involve a lien filed against the house. For example, there may be a public record of a person with a legal claim to the proceeds of the property’s sale to settle the owner’s debt owed to them. Child support is another common debt, and these kinds of liens would be covered under most title insurance policies. In terms of the entire house, an issue may arise when the seller does not actually own title to the property. Again, this kind of error would be covered under most title insurance policies.
Title Insurance: Lender’s Policy and Buyer’s Policy
Title insurance is a one-time investment sold by title companies, title agents, and in some states, attorneys. Title insurance rates are based on the purchase price and type of policy, with some policies being more comprehensive than others. The only time to purchase title insurance is at the closing of the property sale. Title insurance typically combines a lender’s policy with a buyer’s policy.
A lender’s title insurance policy, sometimes called a “mortgagee’s policy,” covers the bank’s interest in your property. This policy should typically be for the amount of the mortgage. In the case that someone else has a claim on the property, the lender’s policy pays for their legal costs and reimburses mortgage payments.
A buyer’s policy covers your own legal fees and other losses relating to the purchase of the house. For example, if there are issues with title to the house, and it is determined that you do not actually own the house, your buyer’s title insurance helps you recover the down payment and principal payments made on the house.
Title Searches and Title Reports
As the first step in securing title to property, a title company, attorney, or escrow company will search public records to trace the history of the property. Common questions might include whether all past mortgages and liens have been paid. Another issue is whether there are any outstanding easements to the property, or pending legal actions.
A title report is the written summary of the status of title to real property, and it includes a description of the property and the names of titleholders, as well as encumbrances and real property taxes due. A preliminary report is the initial report, and once it is recorded and updated, a final title report is issued. The preliminary report provides all parties to the sale a chance to correct issues with the title and even cancel the sale in the case of a serious issue. This preliminary title report also provides critical information for insurance purposes, since often the issues that cannot be cleared may be excluded from coverage.
Title insurance typically insures the accuracy of the title report. The insurance company could correct any error or be responsible for damages resulting from an encumbrance or title flaw that was not reported. The seller is responsible for any title defects, not the property buyer.