What is Title Insurance?
Title insurance is a one-time purchase, made in the closing stages of buying a home, that offers home buyer’s security against any unforeseen circumstances that could impinge upon, or even revoke, ownership rights. More specifically, title insurance offers security against claims made by outside parties that point to defects in the property’s title. The causes of these defects are numerous and wide-ranging. The property’s previous owner could have an spouse, for instance, who says that they never granted permission to sell. Or a neighbor could appear, arguing that an overlooked clause grants them access to your land. A forged deed could even crop up. Whatever the case, a successfully proven claim can void or limit an owner’s rights to their new property.
While title insurance companies conduct a thorough and extensive public record search for old claims before finalizing a home purchase, it’s still possible for unforeseen issues to slip through the cracks. In that sense, title insurance is a wise safety measure that can protect a home buyer from the considerable hassle and financial loss. Homebuyers should also know that title insurance only protects their interest when purchasing a home. If they rely upon a mortgage to finance the home, they will also need to purchase a separate deed, known as lender’s insurance, that protects the interests of their financial lender.
The Process for Securing Title Insurance, and How it Protects Your Home
According to the American Land Title Association, more than one-third of all title searches reveal a title problem that title professionals must fix before buyers go to closing. To find and resolve these issues, title companies will conduct an in-depth search of public records. Every county in the United States stores public historical records on properties located within it. Either a title agent (whose primary responsibility is to sell title insurance) or an abstractor (whose primary responsibility is to ascertain a property’s historical validity) will conduct a thorough search of these records. County clerks or recorders are the go-to people for assisting in that search. They will help locate and share information about a property and its history, including: legal descriptions, a list of past owners, current mortgages, including home equity lines of credit; tax records, and liens or judgments placed against the property. Any and all information discovered about a property is consolidated into a report that is then shared with the lender.
In approximately two-thirds of these cases, the report will inform the lender that all claims of mortgages, taxes, and other liens against the property’s former owner are cleared and that the home buyer is “clear to close” to proceed with the purchase of the house. In the remaining instances, the report will inform the lender of outstanding claims on a property that will need to be dealt with before the closing of the mortgage. The most common way to resolve outstanding title claims is for the lender to authorize the escrow agent to pay off all claims at the time that the property changes hands, while also providing the closing or escrow agent with a detailed list of instructions on how to do so. Despite this thorough process, in a small percentage of cases, a defect will slip past unnoticed.
A defect in such a scenario can result in someone coming forward with a claim that will require the new owner’s to address the issue. So say, for instance, that a title agent runs a report and it comes back clean. The prospective homeowners put down $150,000 of their own money for the property, as well as an additional $350,000 secured from a lender. Then a claim arrives, from someone who defines himself as the property’s co-owner. He says that he never granted permission to sell the land. At this point, homeowners will need to defend their title, oftentimes by taking the matter to court. If that claim proves successful, then your title insurance protects you from losing not only your $150,000 down payment but also:
- Any equity built into the home
- The cost of legal fees to defend your ownership rights
- Any appreciation on the home’s value
- Other related expenses incurred
The lender, meanwhile, is protected through lender’s insurance, which guarantees a reimbursement on that $350,000 mortgage if the claim proves successful.
Closing the Deal on Title Insurance
Homebuyers are eligible for title insurance once the title agent or abstractor has finalized the search of public records. At that point, a homebuyer will have two purchasing options, depending upon payment methods:
- A home buyer paying for the property in cash will pay for the title search, title report, and title insurance.
- If the home buyer is using a mortgage, then the lender is responsible for asking for the title search, the report, and the title insurance, although the homebuyers will still pay for these costs in the home’s settlement price. In some states (or sections of states, such as Southern California), the seller is required to pay for the title insurance.
Once title insurance is purchased, a homeowner is protected for as long as the title remains in their possession. If that title ever changes owner, then a new title insurance policy must be purchased. The new owner can get a discount on the title policy if it is within 3 years of the original owner closing on the home. With that exception in mind, most people will only purchase title insurance once: a relatively simple item that will provide much-needed security and peace of mind.