What is Title Insurance?
Title is a bundle of rights in real property. Protecting purchasers and lenders against loss is accomplished by the issuance of a title insurance policy. Usually during a purchase transaction, the lender requests a policy, referred to as the Lender’s Policy, while the buyers receive their own policy, known as the Owner’s Policy.
When rights to real property are transferred, insurance is purchased to cover potential losses which might result from unforeseen defects in the title. For example, a lien on the property that went undiscovered during the purchase transaction could be exposed years later and result in losses for either the homeowner or the bank financing the transaction. In the event of such a loss, the title insurer would cover the expense in accordance with the terms within the policy.
Generally, lenders and owners carry separate policies. The Lender’s Policy insures the lender for the amount of the loan. The Owner’s Policy insures the purchaser for the purchase price.
How does title insurance differ from other types of insurance?
Unlike types of insurance policies which are designed to cover expenses incurred from unforeseen events in the future, such has homeowner’s insurance, title insurance covers future losses caused by events that occurred in the past.
Title insurers perform an extensive search and examination of public records to determine if any adverse claims, or title defects, are attached to the property. Title defects are either eliminated prior to the issuance of a title policy or their existence is excepted from coverage. For a one-time nominal fee, your policy is issued after the closing of your new home, and the policy is in good standing for as long as you own the property.
What is involved in a title search?
A title search is made up of three searches:
*Chain of Title, which show the history of ownership of the property
*Tax Search, which reveals the status of taxes and assessment on the property
*Judgment and Name Search, which identifies any judgments and liens against the property owners and purchasers
When these three searches have been completed, the file is reviewed by an examiner who determines:
*Does the seller have the legal right to transfer title of the property?
*Are there current or past-due taxes or assessments that must be paid prior to transferring the property title?
*Are there any unpaid liens or settlements against the owners or property that must be paid prior to transferring the title?
Rights established by judgment decree, unpaid federal income taxes and mechanic lies all may be prior claims on the property, ahead of the buyer’s or lender’s rights. The title search should uncover any title defects that are of public record, and allow the title company to work with the seller to resolve the defects prior to closing.
Once the searches have been completed, and known defects resolved, the title company issues a policy stating the conditions under which it will insure title. Most undiscovered defects are covered by the insurance policy.