Title Insurance

Real estate transactions can be complicated. For many of us, a home purchase is likely the most expensive item we will ever purchase. Terms like escrow accounts, commission fees, closing costs, and mortgage loans become commonplace. Homeowners can also refinance their real property with a bank or mortgage lender following the home purchase.

However, before purchasing a home, homebuyers need title insurance. They must ensure there are no issues with the title. For this reason, many prospective buyers purchase title insurance. Read on to learn how title insurance works and why it's a wise investment.

What Is Title Insurance?

"Title" refers to legal ownership and the right to possess something, whether a house, car, boat, or other item. When you have a clear title, you own the asset without any encumbrances on ownership.

A title agent searches public records to ensure there are no title issues with a home. They typically perform these duties alongside a real estate closing.

Title insurance protects homebuyers and lenders from financial loss sustained from title defects. The most common type of title insurance is lender's title insurance. The borrower purchases title insurance to protect the lender. The other type is an owner's title insurance policy, which the seller purchases to protect the buyer's equity in the property.

Title Issues That Impact Real Property

Types of issues you could have with the title to your home include:

• Liens: A lien is a claim on the property to repay a debt owed by the homeowner (or a previous owner). For example, if you refuse to pay a contractor for home improvement work, they may get a lien on your house as security to satisfy the debt. Typical liens include encumbrances or judgments against the property. These can include mortgage foreclosure liens, mechanics' liens, and property tax liens.
• Claims of ownership interests: Other people may claim an ownership interest in the property or encroachments on the property.
• Covenants: A previous owner may have made specific promises to another person or entity regarding using the property. There may be unrecorded easements. For example, an owner may have agreed to let the utility company run power lines across the property. Or there may be a homeowners association (HOA) with rules about what colors you can paint your house.

There are many types of problems you can run into with the title of your new home – some minor and some that present restrictions or obstacles to the use and ownership of the property.

Types of Title Insurance?

With so much at stake, having title insurance provides an extra layer of protection and peace of mind. Before you purchase insurance, the insurance company performs a title search to look for potential title defects. You can then work with the seller to clear up these defects. Based on the title search, the insurance company may offer terms and rates on a title insurance policy.

The policy will specify what title defects they will cover and whether there are any exclusions that they won't cover (such as defects discovered but not resolved). There are two different types of title insurance policies.

Lender's Policy

When you take out a loan to buy your house, the house is the security for the loan. Many lenders will require you to get a lender's title insurance policy. The homebuyer or the seller typically pays for the lender's title insurance policy. The lender usually requires it. Such insurance only protects the lender's interest.

Title defects can affect the house's use as a security interest. A lender's policy only covers the loan amount you have outstanding. It leaves you without coverage for the home's value over the outstanding loan.

Owner's Policy

The homebuyer purchases an owner's policy. Purchasing an owner's title insurance policy may not be required. However, it is prudent to protect your property rights and your trustees, heirs, and beneficiaries.

An owner's policy covers whatever the value of your home was when you bought it. Hopefully, the value of your home goes up over time. You can protect your asset as it appreciates. An inflation rider adjusts your insurance coverage amount to reflect that increase in value above the purchase price amount.

What Does the Insurance Company Do if I Have Title Issues?

Under title insurance, the insurance company agrees to protect you against issues discovered in the original title search. However, title insurance won't cover title defects originating after you buy the house. There may have been flawed public records before the policy went into effect. Someone may claim they were given an easement across your property years before you bought your house.

The title insurance company will cover:

• The cost of legal fees for defending you against the claim
• Costs to fix the title issue to protect your investment
• Loss in the event you lose title or rights to the property (subject to limits in your policy)

For a one-time fee, an owner's policy protects your property rights. The benefits remain as long as you or your heirs own the property.

Purchasing Title Insurance

Purchasing title insurance is a critical part of the home purchasing process. Your real estate agent can provide a referral to a title insurance company. Title insurance rates vary based on the coverage and other factors the underwriters evaluate. It's best to comparison shop.

It takes research to obtain the best coverage with a competitive title insurance premium. The American Land Title Association (ALTA) provides information for consumers to learn more about protecting property rights. It can help you find an ALTA member to assist with the closing process and title insurance needs.

Get Professional Help Defending Your Property Rights

Issues with the title can be problematic for any number of reasons. Whether you're working through title problems before the closing or dealing with claims against your ownership years later, an experienced lawyer can be instrumental in defending your rights. Contact a local insurance attorney familiar with title insurance issues today.