Purchasing a home is one of the biggest financial undertakings that most people will ever face — and it’s important to go in with the knowledge you need to make this process easier from beginning to end. Understanding the many pieces involved in your real estate transaction can help you to avoid common pitfalls, know the right questions to ask, and generally feel more confident that your biggest asset will be protected in the years to come.
Title insurance is one of the most important — and often misunderstood — parts of the real estate transaction.
Title insurance is an important protection that can help buyers move forward with confidence and peace of mind — both during the transaction and in the years following the home sale. But what exactly is it, and how does it work?
First Thing’s First: What Is Title?
Let’s start by defining the concept of title. When you purchase a piece of real property, you receive a deed or another form of conveyance that transfers ownership of that property. The deed is the physical component of the transaction, the paperwork that shows that you own the property. The rights you actually receive in a property deal are the property’s title.
Title can best be described as a “bundle of rights,” as Investopedia has explained. When you purchase real property, you don’t have the unfettered right to do anything you’d like with it. You can’t, for example, dump toxic waste, keep a tiger in your suburban home, or, in most cases, build a skyscraper at the end of a cul-de-sac.
What you do receive is a bundle of rights that describe what you can and can’t do with the property while you own it. Broadly speaking, there are five important rights that are largely understood to be conveyed to residential homeowners along with title to the home:
- The right of possession, or the right to live in the home or on the associated land
- The right of control, generally described as the right to use the property in any way that isn’t against the law
- The right of exclusion, or the right to keep others off of the property
- The right of enjoyment, or the right to use your property for your own benefit or entertainment, again, within the bounds of the law
- The right of disposition, also known as the right to transfer ownership
One way to think of it? By transferring title, the seller is giving the new buyer the rights listed above with respect to the property. Each transfer of title is recorded in some way with a relevant government agency, be it a recorder, assessor’s office, county clerk, or registrar of deeds.
The terms “clouds on title” or “title defects” refer to anything that might cast doubt on a homeowner’s ability to convey or transfer all of the rights listed above. Common example of title defects might include unreleased mechanic’s liens or other claims against the property, foreclosure proceedings, or probate issues that cast doubt on the seller’s actual right to convey clear or clean title to the property — for instance, if a long-lost relative or heir emerges and makes claim to the property. Title defects can also be the result of errors, as well as outright fraud, in the event someone records title to a property to which they have no lawful claim. All of these potential issues are a major risk to the sellers, buyers, and mortgage lenders involved in a typical real estate transaction, and they can have devastating effects. To avoid these problems, every real estate transaction requires a title search.
A title search is a public records search performed during a real estate transaction to determine the status of the seller’s title to the property — that is, to confirm that the seller has the right to transfer title to a new owner.
A title search might turn up a lien against the property for unpaid homeowner’s association dues or personal income taxes, a mechanic’s lien if work has been done on the property but payment is in dispute, pending legal actions, important easements impacting access or use of the property, or a levy for unpaid property taxes or fines.
A title search is mandatory for most real estate transactions; no lender wants to provide a substantial mortgage on a property only to discover that other creditors have priority in the event of foreclosure.
A title search is performed by a title company or attorney, and involves reviewing court records, assessments, and previous title records to determine whether the title to the property is clear and unencumbered — that is, that the seller has the right to give the buyer all rights to the property.
Understanding Title Insurance
As you might imagine, the title search process is not always foolproof, and issues can come up from time to time that slip through the search.
From dramatic events like heirs attempting to claim their rightful stake in the property, to forgeries or intentional fraud, to mundane recording errors, there are a number of factors that can lead to unexpected claims arising well after title has been transferred. This is where title insurance comes in. Title insurance provides peace of mind that the homeowner can say that they are the true owners of the property — and that they can afford to defend their ownership should it be challenged in the future.
There are two types of title insurance: lender’s title insurance, also called the lender’s policy, and owner’s title insurance, or the owner’s policy:
Lender’s Title Insurance
Lender’s title insurance, required as a condition of most mortgages, protects the lender in the event it becomes clear that the borrower does not hold clear title to the property. This insurance policy assures the lender of the priority of its security interest in the property in the event of foreclosure or a third-party claim.
Owner’s Title Insurance
Owner’s title insurance protects you as a homeowner in the event of a prior claim against title that only comes to light after the property’s transfer. While most insurance policies protect against future events, providing that the insurance company will pay claims in the event of an automobile accident or health crisis, owner’s title insurance is backward-looking — that is, it protects against title defects that may have existed at the time you received title to the property but that aren’t obvious until a later date.
The kinds of claims that the title insurance policy covers are laid out in the policy documents themselves. Typically, a title insurance policy will cover against issues such as liens, levies, probate claims, fraudulently recorded claims, mental incompetence of the seller, and other common defects. It is important to carefully read and understand your policy. It is as important to understand the types of claims that are specifically excluded from your policy as it is to understand the claims that are included.
Owner’s title insurance typically involves a one-time premium, included as part of closing costs associated with the sale of the home. Depending on the custom in the state, the seller will typically pay the owner’s title insurance premium at closing.
The lender’s policy is purchased by the buyer and covers the lender up to the amount of the loan. It remains valid until the homebuyer either pays off their mortgage or refinances their loan.
Regardless of who pays the insurance premium, title insurance is a critical investment for every homeowner. A title defect can devalue your most important asset — your home — and cost you thousands in unexpected payments and legal fees. A title insurance policy ensures that your financial losses will be covered, and you’ll be protected.
Learn More With Your Trusted Title Insurance Company
Protecting your interests and assets during a home purchase with title insurance may be the most important thing you’ll ever do — and you don’t have to navigate the ins and outs of owner’s and lender’s title insurance policies alone.
If you have questions about what title insurance can do to protect you, what it involves, or how to get it, Landtrust Title Services can help. Please contact us today at [email protected] or by phone at 312.528.9210 to get answers to all of your questions.