If you are considering the purchase of a property, you may wonder — what is title insurance, do I need it, and why do I need it? Even seasoned property owners may question if the added expense and extra paperwork is really necessary, especially considering that people and entities insured by title insurance make fewer claims than other types of insurance.1
The short answer is yes. Title insurance is essential as it protects buyers and lenders from financial loss due to defects in the title to your property. The title company performs extensive research before issuing the policy. It searches public records and reviews the chain of title. This ensures that the seller has the right to convey the property in question to the buyer. This investigation helps identify issues in the chian of title before a transaction is consummated.
The title search will alert you to any liens, easements, and improper conveyances. It will also identify other issues that could create a cloud on your title or affect your use of the property. Title insurance protects you from claims arising out of fraudulent transfers (e.g., the seller does not have authority to transfer the deed). It also covers unpaid mortgages from previous owners and many other issues. These issues could arise and prevent you from the full enjoyment of your property.
What Is Title Insurance?
Every real estate transaction — residential or commercial — must have a clear title to ensure the property is free from liens and other "encumbrances." Title insurance protects the property owner and the mortgage lender against future claims for unknown defects in the property title at the time of sale. For instance, if the property is owned by heirs of a decedent, the seller may attempt to transfer it without approval or knowledge of her co-heirs. Title insurance will cover any losses from a lawsuit by someone else who claims to have an ownership interest.
Ultimately, the goal of title insurance is to investigate the property and the chain of title to identify risks and potential defects in title PRIOR to the transaction being completed. This helps ensure that the new owner will have clear title.
There are two main types of title insurance:
- Lender's Policy: This policy protects the lender's interest in the property. The initial amount of insurance coverage is usually equal to the loan amount. Then, the coverage amount decreases as the loan amount is reduced by mortgage payments.
- Owner's policy: This policy protects the property owner up to the full original sales price of the property. Unlike mortgage policies, the amount of coverage does not decline over time. Owners can purchase an optional market value endorsement so that coverage keeps pace with increases in a property's value over time. In the event of a claim, the full market value of the property would be recoverable.
How Do I Get Title Insurance?
Obtaining title insurance first requires a title search. In performing a title search, the title insurance company will investigate all of the recorded property transfers, tax liens, easements, and any other encumbrances affecting the subject property. The information is then used to create a title report. If any issues are discovered during the title search, they should be resolved prior to closing.
Because title reports are not infallible, title insurance protects against any undiscovered title defects. If a defect in the title is discovered post-closing, and the title company should have disclosed it in its report, the title insurance company is generally responsible for covering any associated legal expenses and damages.
The exceptions to title insurance can be negotiated with the title insurance companies, based on the findings of their investigation.
What Does Title Insurance Cover?
An owner's title insurance policy protects you against certain undiscovered errors in the title, which may include:
- Estate problems, such as undisclosed heirs
- Clerical errors
- Forgery
- Fraud
- Restrictive covenants, such as unrecorded easements
- Encumbrances or judgments against property, such as liens
Given the complex nature of commercial transactions, commercial title insurance may include endorsements addressing additional risks, such as survey issues;
minerals and subsurface substances; taxes; zoning conflicts; and environmental concerns.
Who Pays for Title Insurance?
Title insurance requires payment of a one-time premium, which is paid at closing by the buyer. In most cases, the cost of title insurance is based on the purchase price of the property.
Generally, the buyer pays for the lender's title insurance policy, which protects the lender up to the loan amount. While not required, buyers should also obtain an owner's title insurance policy, which protects the buyer's equity in the property. In some real estate transactions, title insurance may be negotiated, with sellers agreeing to pay for the owner's title insurance to close a deal.
Consult With an Experienced Real Estate Attorney
After reading this article, you should now understand "what is title insurance?" and why it is critical for protecting against potential legal issues and financial losses. Of course, title insurance is just one essential element of a successful real estate transaction.
Footnote
1. https://www.oldrepublictitle.com/media/bm3mtwvv/5_the-cost-of-title-insurance-worth-the-investment.pdf
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
