What is Title Insurance?
So what exactly is “title insurance?” Well, when a property is financed, bought or sold, a record of that transaction is generally filed in public archives. Likewise, records of other events that may affect the ownership of a property, like liens or levies, are also archived.
When you buy title insurance for your property, a title company searches these records to find – and remedy, if possible – several types of ownership issues. First, the title company searches public records to determine the property’s ownership status. After this search, the underwriter will determine the insurability of the title.
Even the most skilled title professionals may not find all problems associated with a property, though. Some risks, such as title issues due to filing errors, forgeries, or undisclosed heirs, are difficult to identify. So after the title company finishes its searching, it also provides a title insurance policy that will help protect you from a variety of issues that might be uncovered later.
If you take out a mortgage loan when you buy your property, your lender will require a loan policy of title insurance. This protects the lender’s interest in your property until your loan is paid off or refinanced.
On the other hand, an owner’s policy of title insurance insures your ownership rights to the property. Even though you’ll pay for this policy only once, your coverage will last as long as you own your home.
A real estate purchase may be the largest financial investment you ever make. So, when you buy an owner’s policy of title insurance, just think of it as buying some peace of mind!
TITLE INSURANCE
Minimizing Risk
In order to properly eliminate risk, the process of issuing a title insurance policy includes a thorough search of public records and court documents to assess and remove any “clouds,” or issues on the property’s title.
Claims
Because of the statistically small percentage of title insurance claims filed each year, it may be difficult for homebuyers to gauge the value of their purchase. However, the low number of claims actually illustrates the effectiveness of title insurance providers in locating and minimizing risks. In fact, a large piece of the premium paid for a policy goes to fund the legwork required to thoroughly research the property’s title. According to the American Land Title Association, the typical expense ratio for a title insurance company is 90 percent, compared with 30 percent for a property and casualty insurance company.
Fees
Because it is a highly regulated industry, title insurance policy types and costs will vary from state to state. You can check with your state’s Department of Insurance for more information on pricing regulations. In general, each policy price is based on the purchase amount of the home (for an owner’s policy) or the total amount of the loan (for a loan policy).
Length of Coverage
Also unlike other types of insurance, the purchase of an owner’s title insurance policy is a one-time event; there are no future premiums to pay as long as you or your heirs hold an interest in the property. That means this fee, generally paid when you purchase the property, will protect you and your family indefinitely for so long as you hold an interest in the property.
That said, if you refinance your home, your lender will likely require you to purchase a new loan policy, as this type of insurance protects the lending institution only for the life of the loan. Your owner’s policy, however, will remain effective.
Have you ever wondered why you need title insurance? Your home may be new to you, but every property has a history. A title search can help uncover title defects tied to your property. And, subject to the terms of the policy, your title insurance may provide you with protection from title problems discovered after you close your transaction. Some of these common title issues are:
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Errors in public records
To err is human, but when it affects your homeownership rights, those mistakes can be devastating. Clerical or filing errors could affect the deed or survey of your property and cause undo financial strain in order to resolve them.
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Unknown liens
Prior owners of your property may not have been meticulous bookkeepers — or bill payers. And even though the former debt is not your own, banks or other financing companies can place liens on your property for unpaid debts even after you have closed on the sale. This is an especially worrisome issue with distressed properties.
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Illegal deeds
While the chain of title on your property may appear perfectly sound, it’s possible that a prior deed was made by an undocumented immigrant, a minor, a person of unsound mind, or one who is reported single but in actuality married. These instances may affect the enforceability of prior deeds, affecting prior (and possibly present) ownership.
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Missing heirs
When a person dies, the ownership of his home may fall to his heirs, or those namedwithin his will. However, those heirs are sometimes missing or unknown at the time of death. Other times, family members may contest the will for their own property rights. These scenarios — which can happen long after you have purchased the property — could affect your rights to the property.
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Forgeries
Unfortunately, we don’t live in a completely honest world. Sometimes forged or fabricated documents that affect property ownership are filed within public records, obscuring the rightful ownership of the property. Once these forgeries come to light, your rights to your home may be in jeopardy.
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Undiscovered encumbrances
When it comes to owning a home, three can be a crowd. At the time of purchase, you may not know that a third party holds a claim to all or part of your property — due to a former mortgage or lien, or non-financial claims, like restrictions or covenants limiting the use of your property.
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Unknown easements
You may own your new home and its surrounding land, but an unknown easement may prohibit you from using it as you’d like, or could allow government agencies, businesses, or other parties to access all or portions of your property. While usually non-financial issues, easements can still affect your right to enjoy your property.
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Boundary/survey disputes
You may have seen several surveys of your property prior to purchasing, however, other surveys may exist that show differing boundaries. Therefore, a neighbor or other party may be able to claim ownership to a portion of your property.
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Undiscovered will
When a property owner dies with no apparent will or heir, the state may sell his or her assets, including the home. When you purchase such a home, you assume your rights as owner. However, even years later, the deceased owner’s will may come to light and your rights to the property may be seriously jeopardized.
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False impersonation of previous owner
Common and similar names can make it possible to falsely “impersonate” a property owner. If you purchase a home that was once sold by a false owner, you can risk losing your legal claim to the property.
Play it Safe
These and other issues are often covered by an owner’s policy of title insurance. When you buy a home, make sure you’re protecting that investment with title insurance.