Definition of Title Insurance
Title insurance is an insurance policy taken during the real estate purchase process to insure against defects to the title of the real estate.
Title insurance is essential to many real estate transactions, protecting parties from mistakes or omissions in the title of a property, as well as fraudulent deeds, mortgages or liens. It operates as both an insurance policy and a disclosure statement, identifying outstanding problems with the title to the property, or potential problems with title.
Types of Title Insurance
There are normally two types of title insurance policies, a lender’s policy and an owner’s policy. In a lender’s policy, the beneficiary is the bank, and it is taken by the bank. The policy is to protect the lender’s interest in the property as security for the loan. The buyer will often pay the premium as a closing cost or incorporate it into their mortgage, even though the lender is the beneficiary of the policy.
In an owner’s policy, the buyer is the beneficiary, and the policy is to protect the interests of the buyer. The policy will protect the buyer as long as he or she has an interest in the property. In many cases, this policy is optional. If stated in the contract, a seller may provide a title insurance policy instead of a Real Property Report, which identifies the improvements to the property.
Title Defects
Defects in the title may be judgment liens, liens for repairs or improvements to the property, tax liens, bankruptcy proceedings, probate proceedings, or deeds that did not fully transfer the property. Every parcel of real estate will have an abstract, or a historical compilation of items affecting the property title. The abstract may go back 100 years or more and list dozens of transactions. The title insurer will review the abstract to determine whether the property has been properly transferred in the past and determine whether anyone listed in the abstract can make a claim to title to the property.
Like other insurance policies, title insurance will list exceptions to coverage and exclusions to coverage. These are most commonly defects in the title revealed through a title examination. The insurer will not pay to fix these items, but list them as an “exception” to coverage. Usually, the mortgage lender will require these defects to be corrected before it will loan money against the property.
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Example
Mr. McGillicuddy is selling a property to Mrs. Danforth, and takes out an owner’s title insurance policy. The title examination reveals that Mr. McGillicuddy was divorced 5 years prior, but through error, there is no evidence that the property was awarded to Mr. McGillicuddy in the divorce. Because of this,Mr. McGillicuddy’s ex-spouse may be able to claim an interest in the property. The title insurer will list this defect as an exception to coverage, and the seller will be required correct this defect to clear the title. If the title insurer did not find this error, and did not list it as an exception, it would be responsible to pay for any loss associated with the defect.
Since you are investing a great deal of money in the real estate you purchase, and you do not want a third party claiming an interest in your property years down the road, title insurance is an essential item for a real estate purchase. The owner of the property will often pay the premium, or the fee for the service provided. The mortgage lender will take out a policy also, and you are usually responsible for the premium as a closing cost. If a policy had been issued recently, the premium for the new policy may be less, since less updating to the title examination is needed.
At First Foundation we strive to be knowledgeable about all aspects of purchasing a home. Please contact one of our mortgage brokers if you have any questions about title insurance.
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