FAQ

Title Insurance: Protecting Homebuyer and Lender Interests

The purchase of a home is one of the most expensive and important purchases you will ever make. You and your mortgage lender will want to make sure the property is indeed yours and that no one else has any lien, claim or encumbrance on your property. Title insurance protects your interests and the interests of the lender, should a claim be made against your property.

What is title insurance?

Title insurance offers protection against claims resulting from various defects (as set out in the policy) that may exist in the title to a specific parcel of real property, effective on the issue date of the policy.

What is a “defect?”

A defect can include a prior claim of ownership from someone other than the person selling you the property, for instance an ex-wife, a former partner or a co-inheritor. It could also include a claim for an easement, giving someone a right of access across your land. For instance, in a lakeside community, an easement along your lakefront property could provide walkway access to the lake for other residents in the area. Another claim could result from a court judgment against the former owner that resulted in a lien placed on the property.

Normally, property and casualty insurance insures against possible losses in the future, such as automobile insurance that protects you against future accidents. Title insurance protects against things that happened in the past, and insurers seek to minimize that risk prior to your purchase of the home. In fact, according to the American Land Title Association, more than 1/3 of all title searches reveal a title problem that title professionals fix before buyers go to closing.

How can title insurers protect against the risk of a claim prior to my purchase?

Before the lender finalizes a mortgage on your property, a search of all public records is conducted by a title agent or abstractor. County clerks or recorders maintain records on each property within the nearly 3,600 counties in the United States . These records include legal descriptions of the property; a list of all past owners; current mortgages held by lenders, including home equity lines of credit; liens or judgments placed against the property; and tax records associated with the property.

After gathering all of the data on the property, a title agent or attorney prepares a report for the lender. Prior to lending against the property, the lender must be assured all claims of mortgages, taxes and liens against the former owner are cleared up so the lender has first claim against the property, should you default.

How can the lender assure all existing claims are paid and the property is free and clear?

At the time of your closing, the lender provides the closing or escrow agent with a detailed list of instructions, authorizing the agent to pay off all claims at the time the property changes hands.

Who pays for the title search, title report and title insurance?

A homebuyer purchasing a home with cash would pay for the title search, title report and title insurance. If the homebuyer is taking out a mortgage on the property, the lender requires the title search, report and insurance as a condition of making a mortgage on the property. However, the fees are still paid by the homebuyer as part of the settlement costs associated with the purchase of the property. Alternatively, in some states, the seller is required to pay for the title insurance. The homebuyer is also encouraged to purchase an owner’s policy in addition to the lender’s policy.

What is the difference between the owner’s policy and the lender’s policy of title insurance?

Title companies routinely issue two types of policies: An “owner’s” policy that insures you, the homebuyer for as long as you and your heirs own the home; and a “lender’s” policy that insures the priority of the lender’s security interest over the claims that others may have in the property.

How long is my title policy in effect?

The title insurance policy is in effect as long as you hold title to the property. If at any time the property changes hands from one owner to another, a new title policy must be purchased to continue protection.

How often will I have to pay a title premium?

ONCE! The fee is due when you purchase the home, and you never pay it again.

Title Issues

The job of searching the public records to identify existing rights and interests is not an easy task. The title searcher or abstracter reviews the public records to find all aspects of title, which can be seen and recognized. From the title search, the title examiner produces an opinion of title, from which the Company will issue its insurance.

In many areas, the title to a property can be traced back to a royal grant, charter, or the United States government. In many areas, titles are not traced back that far; instead, local custom or title insurance company requirements dictate a shorter search.

There are few titles, if any, that have a perfect history from their source, or root, to the present day. Each transfer of ownership is a "link" in what is referred to as the "chain of title." As each transaction or link takes place, there is a potential for a problem. Even if the entire chain of title appears to be in order, the chain is still subject to interpretation. When searching a title, what we are trying to determine are the various rights and interests that make up each link in the chain as it has passed from one owner to another.

A "title" is composed of three basic elements.

  • Rights and interests that are disclosed in the public records or by physical inspection of the property, i.e., deeds, mortgages, leases, etc., parties in possession, utility easements, etc.
  • Rights and interests that are not recorded but exist, i.e., limitations imposed by laws and statutes, etc.
  • Rights and interests that are hidden, i.e., forgeries, secret marriages and unknown heirs.

Every title is made up of many different "rights" and "interests" that may be owned by different people. The "owners" of the property own the most valuable of the property's rights and interests, but other people may also have rights to the property, such as easements for utilities or mortgages, etc.

Each title can be compared to sticks in a bundle. The rights and interests are represented by the sticks. The "owners" own what we call a "fee simple" title, that is, they have purchased the most vital and valuable sticks including rights of possession, use, occupancy, enjoyment, inheritance, etc. Also, within the bundle are sticks that may be owned by other parties. These are called encumbrances and may consist of easements, mortgages, liens, etc.

When a person purchases a parcel of real estate, it is not only the physical property itself that he or she acquires, but the sellers rights and interests, "the seller's title," in the property. It is essential for the prospective purchaser to know before the transaction takes place, precisely what rights or interests the seller can convey. The purchaser also needs to know who else may have rights or interest in the property, and about any encumbrances against the property that may affect the use or enjoyment of the land. The title search must cover all these rights and interests.