What is Title Insurance?
A common question for home buyers is, what is title insurance? Title Insurance is an indemnification policy which insures real property against defects in the title and invalid or unenforceable mortgages. The company issuing the policy will pay to defend any lawsuits that may arise from title issues, reimburse any financial loss due to any title defects or pay to remove title defects that may inhibit a transfer of the property.
If you purchase a home, using an institutional lender, it is almost certain you will be buying the lender a title insurance policy. This will protect the lender against any defects in the title. At the same time, you will be offered an Owners Title Insurance Policy protecting you against any defects in the title. While the lenders policy is required for you to obtain the financing on your home the home owners policy is strictly optional. Even though it is optional I would highly recommend securing a Owner’s Policy for yourself.
What is Title Insurance and why do I need it?
Hopefully you will never need your title insurance policy but when you need it your going to be happy you have it. Here is a few common scenarios I have run into and with a title insurance policy in place the problems can just be a hiccup.
Undischarged mortgages is something we have seen quite a bit of with the refinance boom of the early 2000’s. When a home is refinanced the old mortgage is supposed to be discharged but with the flurry of refinances many of these mortgages fell through the cracks. The problem arises, when you go to sell your home and all of a sudden their is a lien on the property for the mortgage company that should have been discharged but has not been. With out the title insurance policy, the property cannot pass to a new owner as it would become uninsurable to a new title insurance company. While a title insurance company protects the owner/lender they will not take on a title with a known defect. If the seller of a home did not take out an owners policy it would take weeks and possibly months in combination of thousands of dollars to finally get the mortgage discharged.
If you had a title insurance policy the insurance company would indemnify any future claims against the title defect and wrok behind the scenes to remove the title defect, allowing you to close on time.
Another issue that is more serious that I have run into is a foreclosure that was improperly done. I had a seller who bought a property and when they went to sell the home, a title exam found a foreclosure that was improperly recorded. Again, this makes the property virtually unsalable as no lender will finance a property that cannot receive a new title insurance policy.
Since the home owner did have title insurance, the title insurance company, indemnified the new title insurance company from this issue allowing the new home owner to finance the home. Meanwhile after the transfer the title insurance company worked to track down the paperwork and make sure the foreclosure had been properly recorded. In the end, everyone was happy. If the home owner had not had a policy in place they would have been stuck with a home they could not sell until the title issue was resolved. At the time we were unsure if a title insurance policy was in place and were told by an attorney it could run from $20,000 to $100,000 to resolve the issue.
Other common title defects:
• Sudden appearance of unknown heirs claiming an interest in the property
• Forged deeds or impersonations
• Incorrect legal descriptions
• Improper recording of deeds
Where do I get a Title Insurance Policy
Typically when you close on a loan for the purchase of a home, the attorney issues a policy to the bank. With out the policy for the bank you will not be able to finance your home. Additionally, the closing attorney will offer you a home owners title policy at the closing table. Generally, you do not have to do anything but say yes to the Owner’ Policy.
While the lenders policy is usually mandatory, the owners policy is optional. The Owner’s Policy assures that your title company will stand behind you…. financially and legally, if a problem should arise after purchasing your home. The bottom line is that your title company will be there to help pay valid claims and cover the costs of defending any law suits arising from a title defect.
This article, What is Title Insurance?, was written by Kevin Vitali of EXIT Group One Real Estate. Kevin has been helping home buyers for over 12 years achieve their housing goals. If you are starting your home search and would like a free home buying consultation call Kevin at 978-360-0422