A new home is often the biggest financial investment for many individuals and families. With the down payment and all the costs of closing on a home, a buyer may seek to cut costs, however, title insurance is not the place to do this. Most consumers are familiar with health insurance and car insurance, but title insurance can be a bit confusing.
A Primer of Title Insurance
When a buyer purchases real property, the seller is conveying (i.e. transferring) title or legal ownership. Ownership of real property can be held by a person, a husband and wife, two or more individuals or by a corporate entity, partnership or LLC. A title company offers insurance that the title transferred is good and without defects. The amount of insurance taken is based on the value of the real property and is paid in one lump sum at closing. It is not a continuing monthly payment like a mortgage.
There are two types of title insurance policies — a homeowner’s policy and a lender’s policy. A bank will not want to give a mortgage to a borrower/buyer without the lender’s policy. The bank wants to protect its interest in the real property, as does the homeowner.
The buyer customarily orders and pays for both the homeowner’s policy and the lender’s policy. The policy will vary depending on the type of ownership – condominium, cooperative, freestanding house or commercial property. A title company will issue the title policy and provide the insurance.
The policy will contain an abstract (i.e. summary) of the chain of title/transfers and will accurately describe the property with a legal description (referred to as “Metes and Bounds) that is more detailed than merely the address. The policy will also contain a list of any liens on the property such as tax liens or mechanic’s liens (for unpaid work performed by contractors), as well as a list of any “encumbrances” such as other mortgages.
A buyer wants to obtain “clear title” without any legal doubts or possible litigation. A title company will provide some “exclusions” or items it will not insure against. Examples of exceptions are an easement or right of way over the property or a mortgage by the prior owner (which should be paid off or assumed before transferring the property).
Title insurance is also designed to protect against fraud in the transfer. The title examiner will look for long lost heirs or an ex-spouse who could claim rights to the real property being transferred. The title policy will run bankruptcy and Patriot Act searches on the buyer and the seller to ensure the transfer is not in violation of any bankruptcy or anti-terrorism laws. The title company may also run environmental searches to determine if the property is located in a flood or tideland zone, which may affect its insurability.
When there is a tenant occupying the real property, a recording of the parties and a memorandum of lease is recorded in the county clerk’s records where the property is located. This provides notice of the tenancy to the potential buyer, and is listed on the title searches.
The Bottom Line
Title insurance is a critical component of buying a home. As with any financial purchase, selecting a reputable title company is key as is shopping around for competitive prices. American Land Title Association otherwise known as “ALTA” is an industry organization that attempts keeps high standards for title insurance companies. Ultimately it is a valuable tool that will provide you with peace of mind when making such a large financial investment.