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The Function and Value of Title Insurance

What Is Title Insurance? Why Is It Important in Real Estate Transactions?

Title InsuranceWhen you’re involved in the purchase or sale of real property, one of the requirements typically included in the transaction is a valid policy of title insurance. What is title insurance? What does it protect, and why is it often a mandatory component of a real estate agreement?

What Is a Title to Real Property?

The “title” to real property is a legal document that conveys a right of ownership. Real estate is not the only type of property that carries documents of title—your motor vehicle, your boat, certain types of trailers—all require the transfer of title upon sale or conveyance (whereas most other items of personal property do not). A document known as a “deed” is commonly used to legally transfer title to real property, although title can be transferred by court order and other means as well.

What Is Title Insurance?

A policy of title insurance is a legal contract that assures the buyer of real property that they are receiving good title. It protects individuals from potential losses that may arise after a real estate purchase, including unknown defects (such as a fraudulent deed), clouds, or encumbrances (such as unpaid property taxes) on the property. Typically, you apply for title insurance through the escrow or closing agent. The agent’s job is to identify any defects on the title that should be corrected. The agent does this by researching public records including mortgages, deeds, wills, divorce decrees, tax records, and liens.

What Are the Objectives of Title Insurance?

Records regarding ownership of real property are publicly maintained in a governmental office known in many places as the Register of Deeds (depending on your location, the office might be known as the Land Records office or something similar). Any transaction affecting the ownership of land should be recorded with the Register of Deeds, but unfortunately, that doesn’t always happen. The objective of title insurance is to protect the buyer in cases where there are unrecorded liens or encumbrances on the property being sold.

Are There Different Types of Title Insurance?

Yes. There are two types of title insurance available: the owner’s policy, which protects the buyer’s interest, and the loan policy, which protects the lender’s interest.

The owner’s policy protects the homeowner from risks listed in the policy if an individual later sues the buyer asserting that the person who sold the house did not have the right to do so. When you purchase a home and receive a deed showing that the previous owner transferred ownership to you, you expect to receive clear title. A policy of title insurance protects the buyer from all potential contingencies that could compromise free and clear ownership. For examples of such title problems, see the section below titled What Protection Does Title Insurance Provide?

The loan policy works to protect the lender’s interest until the borrower pays off the mortgage. When you purchase a home and receive money from a lender, the lender gets insurance that secures their interest in the value of the property. This policy minimizes the risk associated with lending money for the purchase of real property. It assures the lender that the title to the property was properly researched and filed. This protects the lender should the buyer fail to make the correct payments on the mortgage. The protection of this policy thus extends beyond just title transfer.

How Much Title Insurance Should You Purchase?

Title insurance typically does not state a covered loss amount but pays for any type of covered loss, regardless of the cost.

How Do You Buy Title Insurance?

Typically, your lender or realtor will provide you with a list of companies in your area that sell title insurance. The policy becomes effective when you sign the insurance contract and pay the premium.

How Much Does Title Insurance Cost?

The cost of title insurance is based on the purchase price of the property and is usually paid just once. The price varies based on the geographic location of the property. A typical policy runs anywhere from $500 to a few thousand dollars.

What Protection Does Title Insurance Provide?

Title insurance protects a buyer or a lender from defects or “clouds” on the property title that may prevent free and clear ownership, including the following:

  • Liens or easements on the property that have not been recorded with the Register of Deeds, such as tax liens, contractors’ liens, or child support/spousal support liens
  • Unintentional errors in any recording or filing of property documents, including inaccuracies in the legal description of the property
  • False or forged transfers of title or ownership interest
  • Transfer of title pursuant to the terms of an invalid will
  • Title transfer from a supposedly single person whose divorce is not yet final

What Things Are Not Covered in a Title Insurance Policy?

It is important to understand what the title insurance does not cover so you can protect yourself with other legal remedies. Title insurance does not insure against fire, flood, theft, or other types of property damage or loss that may be covered by homeowner insurance. Title insurance generally does not offer protection in the event of a boundary dispute, or if the policyholder’s spouse asserts rights to the property on grounds of homestead, community property, or joint tenancy survivorship. Finally, the policy will not cover defects created after the policy is created, defects you create, or problems that arise due to failure to pay your mortgage.

What Are the Risks of Not Having Title Insurance?

There are a number of potentially detrimental consequences of not having a policy of title insurance when you purchase real property:

  • You might have to pay to clear any unrecorded liens or encumbrances—Accordingly, you may have to pay someone else’s debt.
  • You may have encroachment issues that cause you to lose some part of your property—If a surveying error has gone undiscovered, you could lose property that should rightfully be yours.
  • You may lose ownership of the property—The worst-case scenario is if the person who sold you the property owned it jointly with others but failed to get their signatures on the real estate contract.

How Is Title Insurance Different from Other Types of Insurance?

When you purchase a policy of title insurance, it generally does not provide you with a stated dollar value of covered losses. As a general rule, unlike most other types of insurance, title policies provide coverage for all defects on title.

Summary

A policy of title insurance provides protection to buyers and lenders after the sale of real property, affording coverage for any defects or clouds on title that lead to expense or compromise free and clear title to the property. The consequences of failing to obtain a title insurance policy as part of a real estate transaction can be serious, including potential loss of the property.

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