Title Search and Title Insurance
What is a title?
When you purchase a home, you are really purchasing the property - which is the right to occupy and use the property. That legal right is usually documented in the form of a deed recorded at the local courthouse. A title may be contested based upon past actions and claims asserted by others. These types of claims can complicate your purchase of the property, challenge your ownership later on, and potentially cause you to lose money or the property.
Why is transferring title to real estate different from transferring title to personal property, such as a car?
Real estate is permanent and can have many owners over the years, as well as rights to use the property. In order to transfer clear title to real property, it is first necessary to determine the rights outstanding on the property.
What is a title search?
You've decided to purchase a home and hope to take possession as soon as possible. The terms have been agreed upon and all the financial arrangements have been made. There's one important detail remaining, before the transaction can close, a title search must be conducted.
The most accurate description of title is a bundle of rights in real property. A title search is the process of determining from the public record just what these rights are and who owns them.
A title search is a means of determining that the person who is selling the property really has the right to sell it and that the buyer is getting all the rights to the property (title) that he or she is paying for.
In most real estate transactions today, a title insurance policy is purchased to assure the buyer that he or she has purchased a valid title.
In those transactions where title insurance is involved, the title company must determine insurability of the title as part of the search process. This leads to the issuance of a title policy, which insures the existence or non-existence of rights to the property.
The title insurance company will, at its own expense, defend the title and will pay losses within the coverage of the policy if they occur.
Why do I need Title Insurance?
Title insurance is a one-time charge assessed at settlement that protects a homebuyer in the event that the property title, which proves ownership, is flawed. Problems with the title can include outstanding mortgages or liens; easements; inaccurate notary acknowledgements; and deeds, wills, or trusts that contain wrong names or improper vestings.
Are there different types of title insurance?
Yes. There are three different types of Title Insurance. A Lender's Policy, Standard Owner's Policy and the Owner's Enhanced Policy. Lender's Coverage is required by all corporate lenders as a condition of the purchaser's loan. This covers only the lender for the amount of the loan they are making to a borrower. The Lender's Policy that the lender is provided with is the standard ALTA 1992 Loan Policy. It provides coverage to the Lender against such title encumbrances as fraud in connection with the execution of document, incorrect representation of the marital status of grantors, wills not properly probated, and many other circumstances that might jeopardize the Lender's security in the property.
The Standard ALTA 2006 Owner's Policy protects you as the owner of real property against fraudulently executed documents, incorrect representations and improperly probated wills as well as any unsatisfied claims that may not appear in the County land records.
The Owner's Enhanced Policy covers you, the owner, against all that is included in a standard ALTA 1992 policy but with additional and enhanced coverage. Subject to limitations, some of the benefits of an Enhanced Policy include:
Mechanic's lien coverage is provided for work done prior to the date of your policy.
Zoning coverage is now provided, insuring that your land is properly zoned for a single-family residence.
Subdivision coverage is now provided in the event your land is a portion of an improperly created subdivision.
Coverage is provided if you, as the owner, are forced to remove an existing structure, other than a boundary wall or fence, due to a previous owner’s failure to obtain the necessary building permit.
Coverage is provided if an adjacent builder builds onto the homeowner's property without permission.
Coverage is provided for forgeries affecting your ownership after the date that your title insurance policy is issued.
If my title has been examined for defects, why do I need insurance?
There are many defects which even the most meticulous search of the land records will not uncover. For instance, it is impossible for an examiner to know whether the marital rights of all previous owners have been relinquished; whether all deeds, mortgages and judgments affecting the property have been properly indexed in the land records; whether all signatures are valid; or whether an unknown heir of a previous owner had a valid claim against the property. Without owner's title insurance you may have no avenue of recovery for these types of problems.
Examples of Title Problems
This list shows why it is important to own title insurance. Although a thorough examination should identify all title problems reflected in public records, not all of these problems are apparent in public records. Any of the title problems listed here can make your title worthless (and yes, these things DO happen) - but an owner's title policy protects you from financial losses caused by title issues. Below is a list of "Hidden Title Problems" that a proper title search would not discover, but that title insurance would cover:
Hidden Title Problems
- Someone has presented themself as the true owner of the land, but actually is not.
- There are forged title documents.
- There are people who claim to have "power of attorney" who don't really have the legal authority to act for another person.
- There are deeds delivered after the death of one of the people involved, without the pre-written consent of the deceased.
- It is discovered that a will isn't legally valid.
- A deed is to, or from, a defunct corporation.
- There are heirs missing or not disclosed in title documentation.
- Wills were misinterpreted.
- Deeds were made by people of unsound mind.
- Deeds were made by minors.
- Deeds were made by non-citizens.
- Erroneous reports were furnished by tax officials.
- Estates were executed with key people absent.
- There is an undisclosed divorce of a spouse who claims to be an heir.
- There is a spouse who is supposedly, but not legally, divorced from someone involved in the proceedings.
- Children were born or adopted after the date of a will that involved the property.
- Surviving children were omitted from a will that involved the property.
- Mistakes were made in recording legal documents.
- Title records were falsified.
- Creditors make claims against a property that was sold by heirs or other people named in a will.
- Deeds were made under duress as a last option to foreclosure.
- Easements (limited rights for other parties to use the land) exist that were not located by a survey.
- A deed incorrectly identifies public property as private property.
- There are errors in tax records.
- There are deeds from a bigamous couple.
- Representations on legal documents (e.g., Notary seals) are invalid or incorrect.
- The property was condemned, but there is no official record of the condemnation.
Am I required to purchase title insurance?
Most lenders will require that you purchase a lender's tite insurance policy. This protects their investment in your property. You are not required to purchase an owner's policy; however, your one-time payment will protect your property for as long as you own it.
If my lender requires that I purchase Lender's title coverage, then why do I need an Owner's title insurance policy?
Purchasers often ask why they need an Owner's title insurance policy when the Lender's policy should be enough. The Lender's Policy only protects the Lender, and only for the amount of the remaining loan balance and for the life of the loan. Consequently the policy expires when the loan is paid off. Conversely, the Owner's policy protects the Purchaser's interest in the property he received, and that coverage continues for his lifetime. This is important because lliability for title defects can survive through and even beyond the period of the Purchaser's ownership. Therefore, for a one-time premium paid at the time of settlement, the Purchaser is protected against prior title defects, or claims made against his title, even after he sells the property or pays off the loan. We strongly recommend that Purchasers obtain their own title insurance poilicy to protect themselves as Lenders do.
As an example, assume real estate was purchased for $100,000. A down payment of $20,000 is made, and a lender holds an $80,000 mortgage lien, or benefical interest. The lender acquires title insurance protecting the lender's interest up to $80,000. But the purchaser's down payment of $20,000 is not covered.
What if some matter arises affecting the past ownership of the property? The title insurance company would defend and protect the interest of the lender. The purchaser, however, would have to assume the financial burden of his or her own legal defense. If the defense is not successful, the result could be a total loss of title. The title insurance company pays the lender's loss and is entitled to take an assignment of the borrower's debt. The purchaser loses the down payment, other equity in the property that may have accumulated, and the property. To add insult to injury, the balance on the note is still due!
Why do I need title insurance on a refinance?
Title insurance on a refinanced mortgage is usually offered at a reduced rate, and it assures your lender that you actually own the property. It insures that no one else has a preemptive position in front of the lender, and if someones does, it pays for the lender's losses.
Do I need a new Owner's policy when I refinance?
No. A new owner's policy is not required when refinancing. If a new appriasal is performed and the property is worth more than it was when the owner's policy was issued, your current owner's policy can be updated. The new owner's policy can be issued for the current fair market value of the property and you only pay the difference in premium costs for the increase in coverage.
Why does the lender have to have a new lender's title insurance policy everytime I do a transaction?
Lender's title insurance policies insure the lender's interest in the property up to the face amount of their loan. The policy is only applicable to the specific transaction, and it provides coverage for the mortgage lien and it protects against errors made in the title search connected with that transaction, as well as any pre-existing clouds on title. Therefore, each new lender will want a lender's policy that is specific to their transaction.
Why do you need to buy title insurance again even though you purchased a policy when you first bought your home and there is no change in ownership? It is because a separate policy is needed by the lender insuring the vaidity of your mortgage when it is made. For as long as you own the property your mortgage is valid, but it doesn't insure the new mortgage created when you refinance, and it doesn't provide protection against events that may have transpired between the time you purchased the property and when it is refinanced.
For example, you may have taken out a second mortage on the home that could threaten the priority of the new lender's mortgage. There could be legal judgements against you or a mechanics lien against the property by a supplier who wasn't paid for home improvements.
Lenders also insist on a new title policy, because many mortgages are packaged as securities and sold to investors in the secondary mortgage market. Title insurance is the only practical way to provide the assurance investors demand and to ensure that the mortgages backing these securities are valid and enforceable.
Why do I need insurance on a brand new home?
Even if your home itself hasn't had previous owners, the land that it stands on has. Your policy insures you as the owner of a specific piece of property. It clarifies the property rights and insures that your builder hasn't used it as collateral on another loan, that there are no unidentified easements affecting your property and that no problems will surface to hurt you later.
You choose your title insurance company.
When it comes to title insurance, you have the right to choose whatever company you'd like. Although many people just rely on their attorney, mortgage lender or real estate agent to pick a title insurance company for them, ultimately the decision is yours.
Do all title companies charge the same fees for their services?
Fees may vary from company to company. All reputable companies will supply you with a good faith estimate of their fees and the cost of the insurance prior to settlement.
Do title companies charge different rates for title insurance?
Title insurance rates are set by state insurance commissions and are based on the purchase price of your property (owner's policy) and the loan amount (lender's policy).
Title insurance is a one-time cost.
You don't pay monthly or annual premiums to keep your title insurance - you pay it just one time, typically at closing. Then you are covered for as long as you own your home.