Why Do I Need Title Insurance
Find out why you need title insurance to protect the single largest investment you'll ever make.
What is a title?
Why do you need title insurance?
What types of title insurance are available?
How am I protected?
What are some common title problems?
How does title insurance protect against hazards?
I'm refinancing, why do I need title insurance?
I'm buying a newly built home, do I need title insurance?
What is a closing?
What are closing costs?
Why does your lender require title insurance during
refinancing?
What is a title?
When you purchase a home, you are really purchasing the title
to the property – which is the right to occupy and use the
space. That title may be contested based upon past rights and
claims asserted by others. These types of claims can infringe
upon your purchase of the property or cause you to lose money.
Why do you need title insurance?
A home is usually the largest single investment any of us will
ever make. Title insurance protects against loss of value from
hazards and defects that may exist in the title. These hazards
include fraud, forged signatures on deeds, unknown property heirs,
liens, and documentation errors. If you were uninsured and your
right to title is challenged, you could lose significant money
defending yourself or you could lose your home. Your mortgage
lender will require a loan policy of title insurance to protect
their interest in the value of your property and a homeowner should
purchase an owner’s policy for the very same reason.
Types of Title Insurance
There are two types of title insurance: Lenders
title insurance, also called a Loan Policy, and Owner's title
insurance. Most lenders require a Loan Policy when they issue
you a loan. The Loan Policy is usually based on the dollar amount
of your loan. It protects the lender's interests in the property
should a problem with the title arise. The policy amount decreases
each year and eventually disappears as the loan is paid off.
Owner's title insurance is usually issued in the amount of the real estate purchase. It is purchased for a one-time fee at closing and lasts as long as you or your heirs have an interest in the property. This may even be after the insured has sold the property. Only Owner's title insurance fully protects the buyer should a problem arise with the title that was not uncovered during the title search. Owner's title insurance also pays for any legal fees involved in defending a claim to your title.
In order to issue title insurance, the title company must search public land records for matters affecting that title. Many search the "chain" of title back 50 years. Twenty-five percent of title searches find a title problem that is fixed before the insurance is issued. Some examples of items that can cause a problem are: deeds, wills and trust that contain improper information; outstanding judgments or tax liens against the property; and easements. Title companies fix the problems then issue the title insurance.
Occasionally, in spite of an exhaustive title search, hidden hazards can emerge after closing. Things such as mistakes in the public record, previously undisclosed heirs claming to own the property; or forged deeds could cloud the title. Owner's title insurance offers financial protection against these by negotiating with third-parties, and paying claims and the legal fees involved in defending the title.
What are some common title problems?
Fraud & Forgery
(NAPS) — Those involved in real estate fraud and forgery can
be clever and persistent. which can spell trouble for your home
purchase.
In a western state, an innocent buyer purchased an attractive home site through a realty company, accepting a notarized deed from the seller. Then another couple, the trio owners of the property—who lived in another locale—suddenly appeared and initiated legal action to prove their interest in the real estate was valid. Under the owner’s title insurance policy of the innocent buyer, the title company provided a money settlement to protect against financial loss. As it turned out, the forger spent time in advance at the local court house, searching the public records to locate property with out of town owners who had been in possession for an extended period of time. The individual involved then forged and recorded a deed to a fictitious person and assumed the identity of that person before listing the property for sale to an innocent purchaser, handling moot contracts through an answering service. Also, the identity of the notary appearing on deeds was fictitious as well.
Fraud and forgery are examples of hidden title hazards that can
remain undetected until after a closing despite the most careful
precautions. Although emphasizing risk elimination, an owner’s
title insurance policy protects financially through negotiation
by the insurer with third parties, payment for defending against
an attack on the title as insured, and payment of valid claims.
Conflicting Wills
(NAPS) — Conflicts over a will from a deceased former owner
may suggest a study topic for law school. But the subject can
take on a reality dimension and all too quickly your home ownership
is at stake.
Alter purchasing a residence, the new owner was startled when a brother of the seller claimed an ownership interest and sought a substantial amount of money as his share. It seemed that their late mother had given the house to the son making the challenge, who placed the deed in his drawer without recording it at the court house. Some 20 years later, after the death of the mother, the deed was discovered and then filed. Permission was granted in probate court to remove the property from the late mother’s estate, and the brother to whom the residence initially was given sold the house. But the other brother appealed the probate court decision, claiming their mother really did not intend to give the house to his sibling. Ultimately, the appeal was upheld and the new owner faced a significant financial loss. Since the new owner had acquired owner’s title insurance upon purchasing the real estate, the title company paid the claim, along with an additional amount in legal fees incurred during the defense.
Missing Heirs
(NAPS) - When buying a home, it's important to remember what you
don't know can cost you.
As an example illustrating the need for precautions, The American Land Title Association pointed to a couple who purchased a residence from a widow and her daughter, the only known heirs of the husband and father who died without leaving a will.
Soon after the sale, a man appeared - claiming he was the son of the late owner by a former marriage. As it turned out, he indeed was the son of the deceased man. This legal heir disapproved of his father's remarriage and had vanished when the wedding took place. Nonetheless, the son was entitled to a share of the value of the home, which meant an expensive problem for the unwary couple purchasing the property.
Although the absence of a will hindered discovery of the missing heir in a title search of the public records, ALTA said that owner's title insurance issued at the time of the real estate transaction would have financially protected the couple from the claim by the missing heir. For a one-time charge at closing, owner's title insurance will safeguard against problems including those even an exhaustive search will not reveal.
ALTA reminded that owner's title insurance is necessary to fully protect a home buyer. Lender's title insurance, which is usually required by the mortgage lender, serves as protection only for the lending institution.
How does title insurance protect against
hazards?
An owner’s policy of title insurance requires the insurance
provider to pay for defending against any lawsuit attacking your
title as insured, and will either clear up title problems or pay
the insured's losses. For a one-time premium generally paid at
closing, an owner's title insurance policy remains in effect as
long as you, or your heirs, retain an interest in the property.
I'm refinancing, why do I need title
insurance?
When you refinance you are obtaining a new loan, even if you stay
with your original lender. Your lender will require lender's title
insurance to protect their investment in the property. You will
not need to purchase a new owner's title policy; the one you bought
at closing is good for as long as you and your heirs have an interest
in the property.
Even if you recently purchased or refinanced your home, there are some problems that could arise with the title. For instance, you might have incurred a mechanics lien from a contractor who claims he/she has not been paid. Or you might have a judgment placed on your house due to unpaid taxes, homeowner dues, or child support for instance. The lender needs reassurance that the title to the property they are financing is clear.
If it has been no more than 10 years since you bought your house or refinanced, ask for a reissue or discount rate. They are not available in every state, and you might have to meet some criteria to be eligible, so be sure to ask.
I'm buying a newly built home, do I need
title insurance?
Construction of a new home raises special title problems for the
lender and owner. You may think you are the first owner when constructing
a home on a purchased lot. However, there were most likely many
prior owners of the unimproved land. A title search will uncover
any existing liens and a survey will determine the boundaries
of the property being purchased. In addition, builders routinely
fail to pay subcontractors and suppliers. This could result in
the subcontractor or supplier placing a lien on your property.
Again, lenders want to be sure the property has clear title, and
they are insuring the correct property. Purchasing owner's title
insurance will protect you against these potential problems and
pay for any legal fees involved in defending a claim.
What is a closing?
Closing, which is also known as "settlement" or "escrow,"
is the event where the title to a property is transferred from
seller to buyer. Closing is typically held in an office, such
as that of an attorney, title agent or title insurance company,
and involves the completion of all the necessary paperwork to
finalize the agreement between buyer and seller. In addition,
all financial issues are settled at closing – closing costs
- and once the title is successfully transferred, the necessary
documents are prepared, signed, and filed with local authorities.
What are closing costs?
Closing costs are all costs required to close
the real estate transaction. They can include (but are not limited
to) surveying fees, property taxes, title insurance, attorney
fees, agent fees, points, loan origination fees, primary mortgage
insurance (PMI), and the balance of your down payment. Prior to
closing, you should review your final closing statement or HUD-1
Statement (whichever is in use) to ensure that all the calculations
are correct and that you have been given all the credit for deposits
and other agreed upon buyer and seller credits. Also recheck all
lender, title, and escrow fees to make sure they are accurate.
Why does your lender require title
insurance during refinancing?
From the lender’s standpoint, a refinanced mortgage is actually
a brand new mortgage – complete with the same risks that
may have been present originally. During the refinance process,
your original mortgage is paid off – and your existing lender’s
title insurance policy is rendered null and void. However, if
you purchased an owner’s policy of title insurance at your
original closing – that policy will remain in effect as
long as you or your heirs own the property.