Buying a home, whether it’s your first or your fifth, can be overwhelming. Many people don’t think to consider who owned the property prior to them. This is where title insurance comes into play. To protect against issues arising from prior ownership, Investment Title highly recommends purchasing title insurance.
Let’s break this down for you. The word “title” is defined as a term for all your legal rights to own property. Insurance is the protection and indemnification (compensation) guaranteed compensation against loss, damage, etc. for a premium payment. When putting both words together, we describe title insurance as the legal right to protect property buyers and mortgage lenders against previous defects or problems with title. These problems can range from fraud to simple documentation errors. The last thing you want is to move into your brand-new home and find out that the property legally belongs to someone else, or that your seller was a fraud- they didn’t have the right to sell you the property. Although this seems unrealistic, over half of all real estate transactions have title-related issues in some way. But this risk could be reduced the title company by conducting a thorough title search and the owner and lender buying title insurance.
Here are a few other terms you will hear when you are purchasing a home or property:
1. Escrow: The period of time when a third party holds funds for the home sale until the transaction is ready to be completed.
2. Title search: A title search will occur during escrow. This is when the title company searches public records to reveal any outstanding issues with the chain of title (title passing from one party to another).
3. Lien: If someone owes money to another person (lienholder), then the lienholder can become the owner of the debtor’s property until it is fully paid off. An example of this is if a contractor was never paid for their work, the contractor could have a “construction lien.” Additionally, if the currently or previous owners were behind on their property taxes there could be a “property tax lien” on the property. This presents a problem for the potential new owner, so those liens need to be resolved or “discharged” prior to transferring title.
Title insurance works a lot like most insurance policies. The only difference is that it protects you from things that happened in the past rather than events in the present or future. Additionally, you pay a premium one time at closing and it covers you for the duration of your ownership (or your heirs).
Now that we understand the overall purpose and definition of title insurance we can talk about the two most common types of title insurance.
1. Owner’s Insurance: Protects the home buyer from any title-related issues. Although this type of insurance is optional, it is highly recommended.
2. Lender’s Insurance: Protects whoever is issuing the mortgage loan, such as the bank. Once you have completely paid off the mortgage, the policy ends. This type of policy is typically required by the lender and is paid for by the borrower.
After reading all of this, you have probably wondered if getting title insurance is even necessary. Most, if not all, lenders (banks, mortgage companies, and credit unions) require you to purchase lender’s insurance. On the other hand, an owner’s policy is not required but is highly recommended. Purchasing an owner’s policy is a smart decision since it covers the home’s total value. If the banks think it is worth protecting their financial asset, shouldn’t you protect yours?
So, here’s how it works:
Before you can be issued a policy, a title search is conducted. Any of the issues that are found during the search are brought to the seller’s attention and it is usually their responsibility to fix them. Issues could involve the property itself (mortgages, real estate taxes, mechanics liens, home equity lines of credit) or involve the seller (child support liens, judgements, tax liens).
Once the closing has taken place and the requirements of the title commitment have been satisfied you will be issued your title insurance policy which tells you that a thorough title search was completed, any title problems were solved or accounted for, and that the title insurance company will protect you in case any other issues are discovered, as long as it is covered in the policy. Not all issues can be revealed during a title search, no matter how thorough the title company is.
Buying your first home can be intimidating, and you don’t need the added stress of addressing issues with the title on your property. Title insurance can help ensure that you are taking all the necessary precautions for a smooth and successful home buying process.
Check out our FAQ page for answers to more of your title insurance questions.