What is Title Insurance?

The land title transfer system in America works so well that most consumers never take the opportunity to learn how or why it works or understand the personal and societal benefits derived from this highly effective system of assurance.

However, when an individual sits at a closing table to sell one house and buy another, the main reason such a complex real estate transfer can be quickly accomplished is because an independent, third party title/settlement professional has already searched the public record (property records, tax records, and court records) to establish legal ownership of the property being sold, cured any title or public record defects (one-third of all transactions reveal a title or public record defect), accounted for and transferred all of the money intended to change hands, and insured the entire transaction against any mistake, fraud, risk or defect, whether it is known or unknown.

As a practical matter, this means that buyers are more willing to purchase property because they are insured against property fraud and defects in the public record. Lenders are more willing to make loans because ownership by the borrower of the collateral, or real estate, is guaranteed through title insurance. The secondary financial markets are willing to buy mortgage-backed securities because, in the event of a default, their right to the underlying collateral is assured.

Title companies and their agents are involved in completing all aspects of the closing process, from preparation of documents and recording instruments, to preparation of closing forms and collecting and disbursing funds. Before a transaction is completed, a title search of the records is made in an effort to locate potential problems so that they can be corrected and the transfer can proceed. While most problems can be located in a title search by skilled professionals, there can be hidden hazards that even the most thorough search will not reveal. Examples include forgeries in the chain of title, a claim by a previously undisclosed relative of a former owner, or a mistake in the public records, all of which can be covered by title insurance. Liens, easements, rights-of-way, life estates, air and subsurface rights, and future interests are also discovered in a title search and insured by a title insurance policy.

There are two types of title insurance. An Owner’s Policy protects the buyer’s interests while a Loan Policy protects the lender’s interest. An Owner’s Policy is typically issued in the amount of the purchase price, and remains in effect for as long as the owner or their heirs retain an interest in the property. In addition to identifying risk before a transaction is completed, the Owner’s Policy will pay valid claims and all defense costs against claims on the title. A Loan Policy assures the lender of the validity, priority and enforceability of its lien (mortgage) – serving as protection for the lender’s security interest in the property. A Loan Policy is issued in the amount of the loan, and liability decreases as the mortgage is paid off by the borrower.

Since the sale, purchase and transfer of real estate is governed by local law and custom, practices of the title industry vary by locality and are regulated by state governments. Who pays for the title insurance is also a matter of local custom. In some parts of the country, the seller purchases the Owner’s Policy for the buyer, in effect assuring them their title is clear, while in other parts of the country, both the Loan Policy and Owner’s Policy are issued simultaneously, and in still others, the buyer must ask for an Owner’s Policy and pay for it separately.

Title insurance is substantially different than other types of insurance coverage for two reasons:
1) it is paid by a one-time premium that provides protection for as long as the owner or their heirs retain an interest in the property and,
2) title insurance procedures seek to eliminate risk rather than simply price risk.

Do You Really Need Title Insurance? Without it, you could lose your most valuable asset—your home

If you have recently purchased or refinanced a home, chances are you have had to get title insurance. What exactly does title insurance cover, and who does it protect—the homeowner or the lender? Do you need title insurance on a refinance if you bought title insurance when you purchased your home? Here are answers to those important questions, as well as helpful advice on title insurance, and whether or not you need it.

Basically, title insurance protects you against problems affecting the title to your home. There are two types of title insurance — a Loan Policy, and an Owner’s Policy. A Loan Policy protects the lender for the amount of the loan, while the Owner’s Policy protects you, the homeowner, for your investment in the property—your equity. In both cases, the title process covers an exhaustive search of public records to make certain the title to the subject property is clear, and covers against future loss if a claim against the property is made.

While discovering an issue with your title can seem rather remote, one out of every four title searches reveals a problem with the title. Examples include tax liens, forged signatures in the chain of title, recording errors, title search errors, undisclosed easements and title claims by missing heirs and/or ex-spouses. These problems would be uncovered in a title search before you even close on your home.

Even after an exhaustive title search is performed and a title policy issued, sometimes a problem may surface that can threaten your home. If you only have a lender’s policy, where the outstanding loan is covered, your equity is not protected. A separate Owner’s Policy would protect you—for as long as you or your heirs have an interest in the property.

At some point, a homeowner may refinance their home, and they have questioned whether or not they need a new title policy when they refinance. The answer is, you won’t need a new Owner’s Policy, but a lender will require a new Loan Policy because a title search must be performed covering the time since the last policy was issued. It is interesting to note that, even after a title search has been completed, a second search is done just before recording the deed to make sure nothing has affected the title since the initial search, even if it’s only been a few weeks.

Although somewhat remote, there is the chance that unforeseen problems might exist such as a mechanic’s lien from a contractor who claims he/she has not been paid, or a judgment placed on your house for unpaid taxes. The lender will understandably want to make sure the title to the property they are financing is clear.

Rates sometimes vary, and you can certainly shop around and negotiate for the best rates. With the advent of the practice of “bundling” fees into one loan and settlement package, you should be sure to ask if Owner’s title insurance is included.

In some states, the seller actually pays for Owner’s coverage. Be sure to ask about an Owner’s Policy at the time you obtain a Loan Policy.

Remember, title insurance protects you against the potential loss of your most valuable asset—your home.

For more information on the title insurance industry, please visit the American Land Title Association Web site at http://www.alta.org

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