Title insurance is essentially a type of indemnity insurance that safeguards the holder against financial loss that results from defects in a property title. Lender’s title insurance is the most common. This involves the borrower purchasing coverage to protect the lender only. Typically, the owner is available separately and is paid for by the seller to safeguard the equity of the buyer in the property.
Main Takeaways
– In essence, title insurance is a type of indemnity that safeguards the holder against financial loss that results from defects in a property title.
– The most frequent claims filed against a title are conflicting wills, liens (from easements, home equity lines of credit and mortgage loans) and neglected back taxes that had been paid by a title company.
– There is a one-time payment of a fee that covers costly administrative fees for in-depth searches of title data, which could date back to as early as the 1800s.
How Does This Work?
In all real estate transactions, a clear title is necessary. A search must be carried out by title companies on every title as a means of checking for liens or claims of any kind against the property before the title can be issued.
A title search is essentially an evaluation of public records to figure out and confirm the legal ownership of a property and to determine whether any claims have been filed on the property. Unresolved building code violations and erroneous surveys are two examples of issues that can cause a title to become “dirty.”
This insurance provides coverage for both lenders and real estate owners that protects against damage or loss occurring from encumbrances, liens or deficiencies in the actual ownership or title of a property. In contrast to the traditional one, which safeguards against future actions, this type of insurance safeguards against claims for occurrences that took place in the past.
Highlighted below are hazards that are typically covered by a basic owner’s policy:
– Ownership by a different party
– Fraud and forgery relating to title documents as well as incorrect signatures on documents
– Restrictive covenants (terms that decrease enjoyment or value); for example, unrecorded easements
– Defective recordation (flawed record-keeping or the records being inconsistent)
– Judgments against property or encumbrances, such as outstanding liens or lawsuits
Different private transactions could include a warranty of title. This is a guarantee by a seller to the buyer that where an ownership transfer is concerned, only the seller has those rights and the rights to the property belongs to no one else.
Acquiring Title Insurance
A closing agent or an escrow initiates the process after the property purchase agreement has been completed. Five major United States underwriters exist and the attorney or agent usually recommends one. Below are details on these underwriters:
– First American Corporation
– Fidelity National Financial
– Stewart Title Guaranty Company
– Old Republic National Title Insurance Company
– Numerous regional independent companies
Typically, the owner’s insurance costs approximately 1 percent of the purchase value of the property; however, this can vary from one state to the next. For instance, the owner’s insurance for a $1,000,000 property in California should cost between $2,400 and $4,000.
Categories
Lenders’ and owners’ insurance are the two types of the title one (owners’ include extended policies). Just about every lender requires the borrower to acquire a lender’s title insurance policy to safeguard the lender if it turns out that the seller did not have the legal capacity to carry out the transfer of the title of ownership rights. With a lender’s policy, the lender if only protected against loss. The conclusion of a title search is signified by an issued policy and this offers the buyer some amount of assurance.
According to Sunnyside Title, title searches are not necessarily foolproof (there are short searches in residential property transactions that only go back a single deed) and as such, the owner is still at risk where loss is concerned. As a result, there is a requirement for added protection, which can be obtained through the acquisition of an owner’s insurance policy. This type, typically purchased by the seller to safeguard the buyer against deficiencies in the title, is voluntary.
A basic lender’s policy is the most common kind. It is acquired by financial institutions such as banks to cover defects, mechanics’ liens and other liens that have not been recorded, unrecorded access rights/easements and other unrecorded documents.
Frequently, an owner’s policy and a lender’s policy are required together to provide surety that everyone is sufficiently protected. During the closing process, the parties acquire title insurance for a fee that is paid only once. To avoid abuse, RESPA or the (Real Estate Settlement Procedures Act) forbids sellers from demanding that it has to be purchased from a particular provider.
Dangers of Not Having This Insurance
If transacting parties opt against having title insurance, this will expose them to considerable risk if it turns out that there is a defect in the title of the property. Think about a home buyer who is searching for his or her ultimate dream home only to realize, after closing on the property, that there are unpaid property taxes owed by the previous owner.
If the party does not have title insurance, the financial load of the claim for back taxes will solely rest with the buyer. He or she will either risk losing the property to the taxing authority or be forced to pay the unresolved property taxes.
In the same situation, the coverage safeguards the buyer for as long as he or she owns or has an interest in the property. In the same way, lender’s title insurance covers mortgage lenders, banks and other financial institutions from unrecorded access rights, unrecorded liens and a host of other defects. In the event of a default from the borrower, if any issues come about with the title of the property, a lender would receive coverage up to the total of the mortgage.
Real estate investors need to ensure that a property that is on the market does not have a faulty title in advance of selling the property. For instance, properties in foreclosure could have a whole lot of unresolved issues. Buyers have the option of considering the acquisition of the owner’s insurance to safeguard themselves against unexpected claims against the property title.
