What is Title Insurance Anyway?
One of the costs you will encounter in 99% of real estate transactions is a charge for title insurance. What exactly is title insurance?
Unlike Other Insurance
Title insurance is unlike any other kind of insurance. Normally insurance protects a person against bad things happening in the future. Title insurance protects a homeowner against bad things that have happened in the past that the homeowner might not otherwise know about.
What Does a Title Policy Do?
A title insurance policy protects the new owner or the lender against problems such as fraudulent sales, liens, encroachments of fences and boundary lines, unreleased mortgages and tax liens, and other problems with the title to the property. The purpose of a title insurance policy is to provide reassurance—what I call the “sleep at night factor”—to the homeowner, so that the owner actually owns what he or she thinks they own!
What Does the Title Company Do?
Before issuing the title commitment (the promise to issue the policy after closing), the title company will do a thorough search of the real estate and court records in your jurisdiction to make sure the seller actually owns the property being sold and that there are no judgments, tax liens, unreleased mortgages or other problems affecting the property. The title company may also require a survey or an improvement location certificate to make sure the property does not encroach on the next door neighbor property. After doing the research (which may go back 20 years or more), the title company will issue the title commitment and will list any problems it has found with the property. Most title companies will work with the seller to address and fix title problems prior to the sale. In many states, the title company will also prepare all the legal documents needed to transfer the title and complete the transaction at closing.
What Kinds of Title Insurance Are There?
There are two common types of title insurance: the Owner’s Policy and the Lender’s Policy. The Owner’s Policy protects the new owner of the property against the types of title problems mentioned above, and serves as the promise from the title company that if a title problem shows up later, the title company will either fix the problem or will compensate the owner.
A Lender’s Policy protects the mortgage lender against similar issues, and also assures the mortgage lender that if the owner stops making payments on the loan, the lender will be able to act against the property without someone else making a claim on the property superior to the lender’s claim.
In a typical sale transaction, both the owner’s policy and the lender’s policy are issued at the same time by the title company. In a refinance transaction, only a lender’s policy is produced by the title company.
Who Pays for What?
In many jurisdictions the seller of a property will pay for the owner’s policy of title insurance covering the new buyer, and the buyer will pay for the lender’s policy. Different jurisdictions may have different practices, so you should check with your local title company to determine what your costs may be. The services of an attorney may also be required by your state.
Speaking of checking with your local title company, be sure to shop around for the best title insurance rates and services for your transaction. As the owner of the property, you have the right to choose the title company that suits you best, and any attempts to steer your business to a particular title company chosen by someone else may be unlawful.
For more information on title insurance, check the website of the American Land Title Association at www.alta.org and click on “Consumer Information.”
© 2008 Thomas H. McMillen
Tom McMillen, Attorney at Law
Title Officer, Ethical Title Services, LLC