The purpose of title insurance is to protect the Lender and the Buyer against loss from mistakes which could have occurred in the abstract of the title and claims which cannot be discovered by an examination of public records.
Such mistakes include:
- Fraudulent representations
- Undisclosed or missing heirs
- Invalid divorces
- False affidavits
- Liens involving judgments and mechanics
- Unpaid taxes
- Mistakes in recordings and title searches
- Defective foreclosures or tax sales
- Deeds executed under a defective power of attorney
- Clerical errors in the land records
Title insurance
It can often seem like a murky topic, especially to first-time homebuyers. It’s actually a straightforward kind of insurance, and you must obtain it if you want to take out a mortgage on a property. In real estate terms, title is the right to ownership of a property, a right that title insurance protects.Tip
Title insurance exists to protect property buyers and lenders when a seller doesn’t have free and clear ownership of the property; it pays for losses and legal fees stemming from title problems on real estate purchases.
Possible Title Problems
Title to a property is compromised if the property’s ownership is under dispute. This can happen, for example, if the local government has attached a lien for non-payment of property taxes. Other examples include disputes over the inheritance of a property or co-ownership of a property in which one owner never agreed to its sale. Creditors might have a claim on a property for settling debts such as child support or work performed by contractors. When the property serves as collateral for a loan, it can be seized and sold by a lender if the borrower defaults on payments.
Two Types of Title Insurance Policies
The two types of title insurance are buyer policies and lender policies. Buyer policies are also known as owner policies. Assuming you take out a mortgage, you will be required to purchase a lender policy that pays for lost revenue and legal costs a lender experiences due to title problems. Typically, lenders also require you to acquire a buyer's policy for your own protection against losses. The buyer policy helps protect your investment in your property. If you pay for your property without a loan, you might be able to sidestep title insurance, a decidedly risky move.
Title Companies Search Before Insuring
A title company performs a title search before it issues insurance policies. The search covers public records involving the property, including court judgments, tax liens, bankruptcies, divorces, previous deeds, trusts and wills. The title company then issues a preliminary title report that lists any potential problems that must be resolved before the closing. The report declares whether the title company will offer insurance and if so, whether any exclusions will apply. Exclusions arise from questions that cannot be resolved before the sale is completed. It is the seller’s responsibility to resolve title problems, for example, by paying off existing liens on the property.
Who Pays for Title?
The escrow agent will work with a title insurer to obtain a policy. The choice of title company is negotiable between seller and buyer at the time the sales contract is made and different markets have different customary ways of handling title negotiations. In California, for example, the buyer or seller may pay for title insurance and the seller traditionally chooses the title company. The seller may pay for the owner's policy and the buyer usually pays for the lender policy. The policy usually becomes active as of the closing date. Title insurance covers only existing problems. Any new problems that arise after issuance are not covered by title insurance policies.
What is the Purpose of Title Insurance?