If you have ever financed the purchase of a home, your lender probably required you to buy title insurance. This kind of title insurance policy is a lender title insurance. It insures your lender against problems with property ownership that can put your lender at risk. Many homeowners do not really understand owner’s title insurance and how it can save them the expense of protecting their ownership interests.
What Is Title Insurance?
To explain title insurance, it is helpful to have an understanding of what a title is. When you hold title to a piece of property it means you are the legal owner of the property. The title of real estate is evidenced by a deed and other reports and records which show the property chain of title. These documents are recorded in the real estate records of the county where the real estate is located.
The title also includes any encumbrances such as easements and liens that may have been filed on the property such as those for unpaid taxes or unpaid contractors. As part of your mortgage transaction connected to your purchase of a real property, such as your home, your lender will want to do a title search.
Before your mortgage closes, your mortgage lender will hire a title company to complete the title search. The title company will search the public property records and other public records such as divorce records, tax records and court-issued judgments to make sure there are no title defects or competing claims to the property.
Title defects include liens or any encumbrances such as easements that could affect the property rights of the lender or the buyer or adversely affect the value of the property. If such a defect is noted, the title company will try to resolve them so that the transaction can close. In some cases, however, the defect is serious enough that the sale cannot be completed.
Once the title company concludes the title is free and clear of any third-party claims, liens, or encumbrances, the transaction can close and the title company will issue title insurance. Title insurance insures the policy holder against third parties who claim an interest in the property that did not appear in the initial title search before the property was transferred.
For example, a third-party claim can be a construction company that was hired by the prior owner but was never paid for its work on the home, and the company files a mechanics lien against the property which impairs the new owner’s title to it.
Another example of when a third-party claim can arise is when someone else asserts ownership rights that no one knew about when the property was sold, such as an heir to some or all of the property. The title insurance that is required to close is a lender’s policy that protects the rights of the mortgage lender. Title insurance can also be purchased by the property owner.
What Does Title Insurance Cover?
A title insurance policy will cover the costs of any proceedings, including litigation, that arise out of a third-party’s claim that arises after the sale of the property closes. The types of risks that title insurance covers include:
- Undisclosed heirs to the property
- Inconsistent wills
- Liens that precede the new homeowner
- Defective paperwork, like improper recordings from escrow and closing
- Missing information
- Transfers of the deed determined to be illegitimate, forgery or fraud
Additional coverage is available through endorsements or riders to cover other risks, such as:
- Easements on the property that allow other people the right of vehicular and pedestrian access
- Building ordinance violations
- Property boundary disputes
- Subdivision restrictions
- Zoning violations
Types of Title Insurance
There are two types of title insurance. One is a lender title policy, which, as indicated earlier, insures the mortgage lender against any outstanding liens and other problems that can arise with the property title. This policy covers the mortgage lender’s costs of defending against a lawsuit over the property title.
The other type of title insurance is an owner’s title policy. This is a policy that insures the owner’s title rather than the interests of the lender.
Although an owner’s policy is not required when purchasing the property, it will protect you if an heir suddenly sues you to assert their property interests in your property or if a prior owner failed to pay taxes and you find yourself in litigation over their rights to your property. Your title insurance will cover your costs of defense against those kinds of disputes.
Owner’s title insurance makes sense particularly when buying a home out of foreclosure or in new construction where contractors may not have been fully paid. Also, any time you buy property where the title indicates questions about prior ownership rights, buying an owner’s title policy may be prudent.
Contact Mathis Title Company for More Information On Owner’s Title Insurance
The title experts at Mathis Title Company are available to answer any of your questions about title insurance and how it can work for you. Contact them to find out how they can help you with your transaction or any title issue.