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What is an ABSTRACT?
Title insurance is an insurance policy that covers the loss of ownership interest in a property due to legal defects and is required if the property is under mortgage. The most common type of title insurance is a lender’s title insurance, which is paid for by the borrower but protects only the lender. However, owner’s title insurance can be taken out as a separate policy and is paid for by the seller to protect the buyer’s equity in the property.
BREAKING DOWN Title Insurance
Title insurance protects both real estate owners and lenders against loss or damage that can occur due to liens, encumbrances or defects in the title to a property. This differs from normal insurance in that title insurance protects the insured against the potential event that someone else from the past has a legal claim on the property. Common insurance policies, such as car insurance or health insurance, only protect the insured against future events. Title insurance is meant to protect policyholders against claims. These claims can be another person trying to claim ownership on a piece of property, fraud or forgery of title documents, easements and other items outlined in the insurance policy.
Taking out Title Insurance
An escrow or closing agent initiates the insurance process after a property purchase agreement is signed. There are five major U.S. title insurance underwriters, and the agent or a lawyer normally recommends a title insurer.
You understand the benefit of car insurance and homeowners insurance, but chances are you’ve never thought about title insurance until you started the process of buying a house. What is title insurance? It’s a policy that insures that you won’t have any unknown claims made to the ownership of your home.
What could go wrong?
A clean or clear title is important because the title is what gives you ownership of a property. Imagine buying your dream home, closing the deal and then realizing the previous owner hadn’t paid property taxes for several years. Those taxes remain charged against the property and as the new owner, you are responsible. The taxing entity could even take your home. Or perhaps two sales ago someone sold the home without getting the signature of an estranged husband who now wants to stake his claim. Perhaps the previous owner didn’t pay a contractor for some work on the home and the company put a lien against the house. Or the power company shows up with a crew to take advantage of an easement though your new backyard. The scenarios are seemingly endless and tracking down every last possibility is more than you can practically do on your own. That’s where title insurance comes in.
An ounce of prevention
Unlike most insurance policies, you pay just a one-time fee and your property is covered for as long as you or your heirs own it. If you are taking out a loan to buy your home, the lender will require you to purchase lender’s title insurance to cover its investment. Essentially, the lender wants to make sure this is a legitimate deal with someone who has the full right to sell the property to you. But the lender’s policy will only cover the outstanding amount of the loan at the time a claim is made. You also want to make sure you have a policy that covers your interest, called an owner’s policy. When purchased together, the owner’s policy is a relatively inexpensive addition.
As you’ve probably guessed by the one-time fee, title insurance doesn’t work the same way most other policies do. The truth is that title insurers rarely have to pay out on claims. But that doesn’t mean you’re paying them for nothing. To the contrary, unlike other types of insurance, title insurance companies mostly incur their expenses upfront and help prevent any kind of title surprise later on.
While you are in the escrow phase of your purchase, the title insurance company will conduct a comprehensive search to make sure there are no such surprises lurking in the dusty files in some forgotten corner of the county courthouse. The title company searcher looks at deeds, wills, and trusts, tracing the history of the property back many, many years. The search can be manual or on a computer or both, depending on records in your area. Among the important questions is whether all past mortgages and liens have been paid. Does anyone hold an easement? Are there any pending legal actions? That’s where most of your insurance premium goes – to conducting that search. Then, just to make sure you’re protected in case they missed something, title insurance will cover your losses if it turns out later that they missed something.
In some areas, the cost of the title search and the title insurance are separate, while in other regions they are lumped together.
What kinds of policies are there?
What’s covered depends upon your policy. If you purchase only lender’s title insurance and end up losing your home to a previously unknown lien, your mortgage will be paid off. That’s the good news. The bad news is that you won’t get anything to cover the payments you’ve made, including the down payment. You’re out a house. That’s why experts advise buyers to get an owner’s policy as well.
Owner policies come in different flavors. A standard policy will generally cover you up to the purchase price of your home. If you want to protection that will cover inflation, you’ll want an enhanced policy or an inflation rider. That also provides coverage for liens filed after your closing date. Say, for example, you buy a new home and at closing everything is clear. The next day, a subcontractor who worked on construction of your home files a mechanic’s lien. Without an enhanced title insurance policy, you aren’t covered and may end up paying the subcontractor. It’s up to you to look at coverage and decide which owner’s policy you want to purchase.