If you are buying or selling a house, it is well worth your time to have your broker explain title insurance to you, or read up on it on your own. This important, yet seemingly obscure, aspect of the home buying and selling process is also one of the least understood.
How to Explain Title Insurance
What is "Title"?
"Title" is the very basis of private property ownership in America. It is the legal term for the property rights that are held by the owner or owners of a piece of property. The term also applies to the legal document that is issued as evidence of the owners' exclusive rights and control over their property. A transfer (also called conveyance) of ownership requires a transfer of title from one owner to the next.
What is Title Insurance?
Title insurance is an insurance policy that is issued by a title company to protect and indemnify the property owner against any financial losses resulting from title defects, once the purchase is complete. Such losses may result from fraud, undisclosed liens, back taxes, estate issues and claims or judgments.
Purpose of Title Insurance
As with all other types of insurance, title insurance is designed to enable you to avoid risk. A title insurance policy provides coverage in the event that some person asserts a legal claim against your property. Some of the most common risks that it will insure you against include:
- Forged title deed, will or release
- Missing or undisclosed heirs
- Property liens for unpaid income, estate or inheritance taxes
- Impersonation of the property's true owner
- Mistake made while recording legal documents
If you need a mortgage to purchase property, your lender will require you to purchase title insurance. Just like mortgage insurance, title insurance is purchased to protect the interests of the lender, but you as the buyer are responsible for paying the policy premium.
Unlike other types of insurance (such as warranties or homeowner's insurance) that protect against problems encountered after the house was purchased, title insurance provides coverage for losses resulting from events that occurred prior to the date the policy was issued. In effect, it does not cover any losses resulting from events that occur after the policy is issued.
The Title Insurance Process
- The title company performs a title search of public records to ensure that the seller does actually own the home, and that there is no other party that has a legal claim to the property.
- The results of this search are analyzed, and a title report is written. This report documents any person in the public record who has an ownership interest in this property.
- A preliminary binder is then issued, which is a temporary policy that provides proof of coverage until the actual policy is issued. Essentially, it denotes a commitment to insure.
- A one-time premium is charged, and the title insurance policy is issued. Coverage begins on the date that the policy is issued
Types of Title Insurance
The type of title insurance policy that is written and issued will depend on the party that it is intended to protect. There are the two main types of title insurance:
- An owner's title insurance policy - Insures the property owner up to the purchase price paid for property. A new title insurance policy is issued each time there is a change in property ownership. The coverage it provides cannot be transferred or assigned to subsequent owners of the same property.
- A lender's title insurance policy - Insures the lender up to the amount of the loan issued. The policy's value decreases over time as the loan is paid off. The lender's title policy insures the lender's valid and enforceable lien in the property. It can be assigned to any other party that owns the loan.
A one-time insurance premium is due when escrow closes. Although you only have to pay a single premium, your title insurance guarantees coverage for as long as you or your heirs own the property in question.
The homebuyer will generally be required to pay the premium for the lender's policy, while the seller pays for the title search and examination fees.
In The Event Of a Claim
Should it happen that your title to the property is challenged, your title insurance will cover the cost of any legal proceedings required to defend your ownership rights, including any attorney's fees and other expenses. This provision is in addition to providing coverage up to the face value of the policy.
A Solution, Not a Guarantee
While a title insurance policy will not guarantee that there will not be any problems with the title to your property, it does provide a way to deal with them if they do arise.