Title Insurance Basics: What To Expect

In this article, you will learn about title insurance, its purpose, and the different types of policies available. You will also discover the crucial role that a title insurance company plays, including title searches, underwriting policies, and handling claims.

Furthermore, the article discusses the components of a title insurance policy, common title issues and defects, and how to choose the right title insurance company for your needs. Lastly, the article explains important terms and concepts related to title insurance, such as ALTA best practices and title commitment.

What is Title Insurance?

Definition of Title Insurance

Title insurance is a specific type of insurance policy that protects property buyers and mortgage lenders against any losses or defects in the title of a property. Title defects can include liens, encumbrances, or claims on the property by other individuals or entities. Title insurance is designed to cover the cost of legal expenses and any settlement payouts that may be required to resolve disputes or clear the title for the property owner or lender.

In other words, title insurance ensures that the person or entity purchasing the property has a clean and clear title, free from any claims or issues that could affect their ownership rights.

Purpose of Title Insurance

The primary purpose of title insurance is to protect property buyers and mortgage lenders from any unexpected claims, liens, or encumbrances on the title of the property being bought or financed. When purchasing a property, it’s crucial to ensure that the title is clear and the seller has the legal right to sell the property. Any errors or inaccuracies in the title can result in significant financial losses for the buyer and the mortgage lender.

Title insurance covers the policyholder in case there is any issue with the title of the property that is discovered after the purchase. Common issues include:

1. Unknown liens against the property.
2. Errors or omissions in the deed or title documents.
3. Fraud or forgery, including fake deeds or fictitious owners.
4. Improperly recorded documents or undiscovered encumbrances.
5. Unknown claims by heirs or ex-spouses.

By obtaining a title insurance policy, the buyer and the lender can have peace of mind, knowing that any potential legal disputes or issues with the title will be covered by the insurance company.

Types of Title Insurance Policies

There are two main types of title insurance policies – Owner’s Policy and Lender’s Policy:

Owner’s Policy

An owner’s title insurance policy protects the property buyer from any potential losses or defects in the title. The policy covers the buyer throughout the entire duration of their ownership of the property. If any issues arise concerning the title, the insurance company will defend the buyer in court and cover any legal expenses or settlement fees. The cost of the owner’s policy typically depends on the value of the property being purchased.

Owner’s title insurance is optional, but highly recommended by real estate professionals because it provides essential protection for homebuyers. In some cases, the seller may pay for the owner’s policy as part of the closing costs. However, in most scenarios, it is up to the buyer to purchase the policy.

Lender’s Policy

A lender’s title insurance policy is typically required by mortgage lenders to protect their financial interest in the property. This policy covers the lender in the event that there are any defects in the title or if the seller did not have the legal right to sell the property.

The lender’s policy amount typically covers the outstanding balance of the mortgage loan. As the loan is paid off and the balance decreases, the coverage provided by the lender’s policy also reduces over time. In contrast, an owner’s policy coverage remains constant throughout the duration of property ownership.

Ultimately, it’s essential for property buyers to have title insurance for their investment. Both owner’s and lender’s policies provide protection from the potential risks and costs associated with title defects that may affect the property. By obtaining a title insurance policy, buyers and lenders can have peace of mind and added protection for their real estate transactions.

Role of a Title Insurance Company

Title insurance companies play a crucial role in the real estate sector. They provide financial protection to buyers, lenders and other parties involved in property transactions. A title insurance policy covers the policyholder from financial loss due to defects in the property title, liens, encumbrances, and other issues that might not be visible during the purchase process.

The role of a title insurance company mainly involves title searches, examination, issuing title insurance commitments, underwriting and issuing policies, and handling claim disputes.

Title Search and Examination

The first step a title insurance company takes is to conduct a title search and examination. This process serves to identify any issues or defects related to the property’s title that might affect its value or ownership.

1. Public Records Review:

A comprehensive review of public records is conducted for each property transaction as part of the title search process. This includes investigating land records, deeds, mortgages, easements, liens, judgments, and other legal documents that may affect the property title. These records are available at various public offices such as the county recorder’s office, local courthouses, and other government agencies. The goal is to determine the property’s legal owner, verify their right to sell, and identify any conditions or encumbrances attached to the title.

2. Identifying Title Defects:

After the public records review, the title company examines the findings to identify title defects. Examples of title defects include liens due to unpaid taxes, errors in public records, undisclosed heirs, forged deeds or signatures, and boundary disputes. Such issues may lead to financial loss or even loss of property ownership for the buyer. It’s crucial to uncover and address these defects before the property transaction takes place. The title company may suggest resolutions like clearing liens, resolving contests on a property boundary, or obtaining releases for unclear claims.

Issuing Title Insurance Commitments

Once the title search and examination are complete, the title company will issue a title insurance commitment to the buyer and the lender (if there’s a mortgage involved). The commitment contains information about the title’s current status, details of any defects found in the search, and conditions that must be met before the policy is issued.

The commitment gives the buyer and lender an overview of potential issues and risks involved in the transaction and serves as a guarantee that the transaction will be completed without inherent title issues.

Underwriting and Issuing Policies

After all the identified defects are resolved and conditions met, the title company will underwrite and issue the title insurance policies. There are two primary types of title insurance policies: an owner’s policy and a lender’s policy. An owner’s policy protects the property owner from financial loss due to title defects, while a lender’s policy protects the lender’s interest in the property.

The title company assesses the risks associated with each transaction and determines the appropriate coverage and premium based on property value, location, and other factors.

Handling Claim Disputes

In the event of a claim dispute, the title company’s role involves investigating the claim, determining its validity, and either defending the policyholder against the claim or compensating them for their loss. This process often involves legal work to defend the title and handle lawsuits or negotiations. The title insurance company may hire attorneys or work with the policyholder’s attorney to protect their interests.

When a valid claim is identified, the title company may pay the policyholder the agreed-upon amount or potentially even purchase the property itself to protect the policyholder from financial loss. The primary objective of the title insurance company is to ensure that the property transaction is free from defects and risks associated with the property’s title.

Components of a Title Insurance Policy

A title insurance policy is an insurance product that protects property owners and lenders from issues related to the property’s title. The policy covers financial losses and legal defense costs arising from disputes, errors, or fraud related to the ownership, liens, or other items affecting the property’s title. A title insurance policy is typically purchased during the property buying process and lasts for as long as the insured party has an interest in the property.

Coverage and Exclusions

The coverage of a title insurance policy refers to the specific risks and losses insured by the policy. Some common title risks that may be covered include:

1. Ownership disputes or claims by others
2. Fraudulent or forged documents
3. Errors, omissions, or inaccuracies in public records
4. Liens or encumbrances on the property
5. Boundary disputes or encroachments
6. Unrecorded easements or access rights

Title insurance policies may have a list of standard exclusions, which are items not covered by the policy. Exclusions vary by policy and provider but may include:

1. Matters known to the insured party but not disclosed to the insurer
2. Defects that the insured party creates, adds, or agrees to after the policy is issued
3. Environmental hazards or contamination
4. Eminent domain
5. Disputes arising from property tax assessments

It is crucial to review the coverage and exclusions of a title insurance policy to ensure that it aligns with your needs and adequately protects against potential risks.

Policy Amount and Premiums

The policy amount, also known as the coverage limit, refers to the maximum amount the title insurer will pay for covered losses. The policy amount is typically equal to the purchase price of the property. If the property’s value increases over time, you may want to consider increasing the policy amount to cover any potential losses fully.

Premiums are the one-time payment made to purchase a title insurance policy. The premium amount is established at the time of the policy’s issuance and is generally based on property value, location, and other factors unique to the transaction. The premium may be paid by the buyer or seller, depending on local customs and the agreement between the parties.

Conditions and Stipulations

A title insurance policy contains conditions and stipulations outlining the rights and responsibilities of the insured party and the insurer. These include provisions on:

1. The insurer’s duty to defend and indemnify the insured party
2. Policy deductible, if applicable
3. Policy cancellation and non-renewal
4. Procedure for making claims, including time limits and required documentation
5. Policy assignment or transfer
6. Subrogation, where the insurer steps in to pursue recovery for the insured party’s covered losses

It is important to understand the policy’s conditions and stipulations to ensure compliance and proper utilization of the coverage provided.

Endorsements

Endorsements are add-ons to a title insurance policy that provide additional or modified coverage for specific situations or risks. They are typically purchased at the time of the policy’s issuance and become a part of the policy. Some common endorsements include:

1. ALTA – American Land Title Association endorsements, offering standardized coverage for specific items such as access, encroachments, and zoning restrictions.
2. Variable Rate Mortgage endorsements, protecting against losses due to interest rate increases on adjustable-rate mortgages.
3. Survey endorsements, expanding coverage for boundary disputes or encroachments discovered in a subsequent survey.
4. Restrictions, Easements, and Minerals endorsements, which may offer coverage for losses associated with these specific items.

Endorsements may require additional premiums, and the availability of endorsements may vary by jurisdiction and insurer. Be sure to review endorsements when purchasing a title insurance policy to ensure comprehensive protection for your property.

Common Title Issues and Defects

Title defects, also known as title issues, are potential problems or legal matters affecting the ownership or usage rights of a particular property. Addressing title issues is necessary to avoid future disputes and ensure a smooth property transfer process. In this article, we will discuss the most common title issues and defects, their consequences, and possible solutions.

Liens and Encumbrances

Liens and encumbrances are financial claims against a property that must be settled before the title can be transferred to a new owner. They are usually imposed to secure a debt owed by the property owner. Common examples include mortgage liens, tax liens, judgment liens, and mechanics’ liens.

Mortgage liens are filed by lenders to secure the money borrowed by a property owner. If the owner fails to repay the loan, the lender has the right to sell the property to recover the outstanding amount. Tax liens occur when a property owner does not pay their property taxes, which allows the government to place a claim against the property until the debt is satisfied. Judgment liens result from court rulings that award money to a plaintiff, and mechanics’ liens are used by contractors to ensure payment for their work on a property.

To resolve liens and encumbrances, the property owner must settle the debt, provide proof of payment, or negotiate a release or reduction of the claim with the lienholder. A title search can help uncover any liens or encumbrances, ensuring that they are addressed before the closing process.

Errors in Public Records

Public records contain essential information about properties, including ownership, tax, and other legal matters. Errors in public records, such as incorrect names, addresses, or property descriptions, can affect the title and create disputes over ownership rights. These errors may occur due to clerical mistakes, incomplete or inaccurate data, or filing errors.

Correcting errors in public records is crucial to ensure a clear title. Property owners and prospective buyers should request and thoroughly review a preliminary title report, which discloses all relevant information found in public records. If any errors are discovered, they should be reported to the appropriate government agency or to the title officer for correction.

Illegal Deeds and Forgeries

Illegal deeds and forgeries typically involve an unauthorized or fraudulent transfer of property ownership. For example, a person who is not the legal owner of a property may forge documents to pretend they have the right to sell it, or an individual may use a false or stolen identity to execute a deed transfer. These fraudulent actions can cause significant legal problems and disputes over property ownership.

To protect against illegal deeds and forgeries, buyers should enlist the help of a trusted and experienced professional, such as a real estate attorney or title company, to perform a thorough title search and verify the property’s ownership history. Title insurance can also provide protection against potential financial losses resulting from such issues.

Boundary Disputes and Easements

Boundary disputes and easements involve disagreements over the use and limits of a property, affecting the rights of the property owner and neighboring property owners. Common disputes can stem from unclear property lines, shared driveways, or access rights to a neighbor’s land. Easements grant others the right to use a portion of a property for specific purposes, such as utilities or public access, and can potentially affect the property’s value or usage rights.

To resolve boundary disputes and easement issues, property owners should consult a land surveyor to obtain accurate and updated property measurements. A survey can help clarify property lines, shared areas, and any encroachments. If disputes persist, mediation or legal action may be necessary to reach an agreement.

Missing Heirs and Incorrect Legal Descriptions

Issues related to missing heirs and incorrect legal descriptions can also affect the title. Missing heirs are individuals who may have a legitimate claim to the property but were not identified during the title search process. This can occur when previous owners die without a will or when unknown heirs claim their inheritance after a property sale. Incorrect legal descriptions can lead to confusion and disputes over property ownership, as they describe the property’s boundaries and location.

To avoid issues related to missing heirs, a thorough title search, including probate records, is essential. Property owners can also create and regularly update a will to ensure their intended beneficiaries are well documented. In cases of incorrect legal descriptions, a land survey and ensuring accuracy in public records can help correct errors and prevent future disputes.

How to Choose a Title Insurance Company

Title insurance is a crucial component of buying or refinancing a property, as it protects you from potential legal issues that could arise from the ownership of the property. Choosing the right title insurance company involves evaluating costs, services, reputation, financial stability, experience, and customer service. This article provides a comprehensive overview of what to consider when evaluating title insurance companies.

Comparing Costs and Services

The first step in choosing a title insurance company is to compare the costs and services offered by different companies. Bear in mind that you will need to compare both the cost of the title insurance policy and the cost of the additional services offered by the company, such as title search, document preparation, and closing services.

Start by getting quotes from multiple title insurance companies. You can do this by contacting the companies directly, working with a real estate agent, or using an online quote comparison tool. Be sure to ask each company for a detailed breakdown of the costs associated with the policy and any additional services they offer so that you can make a fair comparison.

In addition to the cost, consider the quality and accessibility of the services offered by each title insurance company. For instance, some companies may offer online services such as electronic document signing or instant access to information about your policy, which can streamline the process and make it more convenient for you, while others may not.

Take the time to review the fine print of each company’s policy to ensure that it provides the level of coverage you need for your specific transaction.

Reputation and Financial Stability

Another crucial aspect of choosing a title insurance company is its reputation and financial stability. The company you select should have a proven track record in the industry, with few customer complaints and litigations. Investigate each company’s financial stability, as a financially stable title insurance company is more likely to be around to address any potential claims in the future.

To verify a company’s reputation, start by consulting reviews and testimonials from past customers, which can be found on third-party websites or by asking for referrals from people you trust. Additionally, consider checking the company’s rating with business rating agencies such as the Better Business Bureau (BBB) or A.M. Best. Finally, research any litigation and regulatory actions involving the company to identify potential red flags.

Experience and Expertise

The experience and expertise of a title insurance company are essential factors to consider, as this ensures that the company can accurately assess the risks associated with your property and issue a reliable title insurance policy.

Look for a company with extensive experience in the field – specifically one that specializes in title insurance and related services. Ensure that the company has a team of experienced professionals, including underwriters, attorneys, and title search experts, who are well-versed in the intricacies of property law and local regulations.

Make sure the company has experience working with properties similar to yours, as different types of properties may require different levels of expertise. For instance, if you are purchasing a historic home, a company with expertise in handling historical properties will be better suited to assess the potential risks associated with the property.

Customer Service and Responsiveness

Finally, evaluating the customer service and responsiveness of a title insurance company is essential. The company you choose should be dedicated to providing prompt, efficient, and courteous service throughout the process.

When contacting companies for quotes or information, pay attention to how quickly and effectively they respond to your inquiries. Take note of the level of professionalism displayed by the company representatives during your interactions. High-quality customer service can be a good indicator of the company’s overall commitment to its customers.

By considering these factors – costs and services, reputation and financial stability, experience and expertise, and customer service and responsiveness – you can find the right title insurance company for your needs and ensure a smooth, successful property transaction.

Important Terms and Concepts

ALTA Best Practices

ALTA, or the American Land Title Association, is a national trade association representing the land title insurance industry in the United States. It seeks to promote the growth and development of the industry through the establishment of clear standards, best practices, and educational opportunities.

One of the roles of ALTA is to develop and promote best practices for professionals in the land title industry. These best practices help to ensure that title companies provide the highest level of service and professionalism to their clients. There are seven ALTA Best Practices Framework, which are guidelines for homeowners and lenders to follow when working with a title company.

1. Licensing: The title company must have appropriate licenses to perform title and settlement services.
2. Escrow Accounting: The company must properly maintain separate escrow trust accounts and reconcile them regularly.
3. Protecting Non-Public Personal Information (NPI): The title company must adopt and maintain a written privacy and information security program to protect NPI.
4. Settlement Processes: The company must adopt standardized processes to ensure a secure and compliant closing.
5. Policy Production: The company must follow underwriting guidelines and issue title insurance policies promptly.
6. Professional Liability Insurance: The company must maintain professional liability insurance, fidelity bond coverage, and errors and omissions insurance.
7. Consumer Complaint Resolution: The company must have a process in place for resolving consumer complaints.

Title Commitment

A title commitment is a document provided by a title insurance company in response to a title order from a buyer or lender. The document sets forth the terms, conditions, and requirements that will be included in the title insurance policy being issued.

The title commitment includes important information about the property, such as the owner’s name, legal description, and any liens, encumbrances, or other matters affecting the title to the property. The title commitment also outlines the conditions under which the title insurance policy will be issued, including any exceptions to coverage, and lists any requirements that must be fulfilled before the policy will be issued, such as payment of outstanding taxes or obtaining releases for existing liens.

Title Abstract

A title abstract is a summary of the history of a property’s title, including ownership, liens, and encumbrances. It is prepared by a title company or attorney by conducting a thorough search of public records related to the property. The purpose of a title abstract is to provide a potential buyer or lender with accurate information about the property’s title and any potential issues that need to be resolved before a sale or loan can be finalized.

The title abstract typically includes information such as names of previous owners, dates of ownership transfers, mortgage information, liens and judgments, and easements or use restrictions. Any issues identified in the abstract, such as unreleased liens or outstanding taxes, must be resolved prior to closing so that the buyer can receive a clear title to the property.

Easements and Rights of Way

Easements and rights of way are legal rights granted to another party to use or access a portion of a property for a specific purpose. Easements can be necessary for utilities, such as powerlines or waterlines, to cross over or pass through a property. Rights of way can be granted for another property owner to access their land if it is landlocked and would otherwise be inaccessible.

These legal rights can be granted in various ways, including through written agreements, deeds, or by operation of law. They are considered encumbrances on the title to the property and will typically be found in the title abstract and listed as exceptions to coverage in the title commitment. When considering purchasing a property, it is important to understand the existence and nature of any easements or rights of way, as they can affect the intended use and value of the property.

Title Insurance Basics FAQs

1. What is the purpose of title insurance?

Title insurance protects both property owners and lenders against potential losses arising from disputes or defects in the property title, such as liens, encumbrances, or ownership claims. This insurance assures a clear title transfer and provides legal defense and coverage for financial loss in case any issues arise.

2. How does title insurance differ from other types of insurance?

Unlike other insurance policies that protect against future events, title insurance primarily safeguards against past events that may affect the property title. Thus, title insurance covers pre-existing conditions and provides coverage for as long as the insured party holds an interest in the property.

3. What are the two main types of title insurance policies available?

Title insurance consists of two primary policies: Owner’s title insurance and Lender’s title insurance. Owner’s policy protects the property owner’s interests, while Lender’s policy safeguards the lender’s financial investment in the property. Lenders usually require borrowers to obtain a Lender’s policy as part of the mortgage process.

4. How is a title search conducted and why is it important?

A title search involves a thorough examination of public records to identify and trace the history of ownership and any encumbrances affecting the property. This comprehensive search is critical to ensure title defects are discovered and rectified before a property transfer, to protect both buyer and lender interests, and to provide the basis for issuing title insurance.

5. When should a buyer obtain title insurance and how long does it last?

A buyer should obtain title insurance as part of the closing process when purchasing a property. The Owner’s policy typically lasts as long as the insured owner, or their heirs, hold interest in the property. The Lender’s policy remains until the mortgage loan is entirely paid off.

6. What happens if a title defect is discovered after closing and the property is insured?

If a title defect arises after obtaining title insurance, the title insurance company is responsible for providing legal defense and coverage for financial losses up to the policy limit. This can include settling claims, reimbursing for losses, or taking corrective actions, such as clearing liens or ownership disputes.