Title
Insurance
What
is Title Insurance?
What kind of problems?
What does title insurance cover?
Who is covered by title insurance?
Why do you need title insurance?
The loan policy does not protect the
borrower.
What is the danger of loss?
How can there be a title defect if
the title has been searched and a loan policy issued?
What title insurance protects against.
What protection
does title insurance provide against defects and hidden risks?
What
is Title Insurance?
Title insurance is actually a process, with the insurance policy being
the end product. This process starts with a comprehensive search of public
records to determine if any liens or other encumbrances are attached to
the title. During the search, detailed information from a number of sources
is gathered and reviewed, including tax records, federal, state and local
records, court judgments, deeds and an evaluation of whether the property
characteristics are accurately reflected by the information on the title.
Not surprisingly, one in four title searches uncovers some problem that
must be rectified prior to the closing.
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What
kind of problems?
There are four primary categories that can cloud a title and result in
significant risk for a prospective homebuyer. The title search meticulously
seeks out and evaluates any known indication of any of these issues; however,
even the most comprehensive search may not uncover every hidden area of
title risk:
Liens
can be placed against a title by any party with an unpaid financial
obligation against the property owner. The nature of these claims can
be everything from unpaid child support or alimony to unpaid parking
tickets or bills from contractors like electricians or plumbers.
Errors
may have occurred during the course of previous ownership changes
that could have included recording errors, typographical errors, incorrect
legal descriptions, incorrect indexing of land records or title search
errors resulting from undisclosed issues like unsatisfied claims not
shown in the public record.
Claims
against a property may come from missing heirs or heirs born after the
execution of a will, the marital rights of spouses of former owners,
claims from ex-spouses or even from government or corporate entities.
They can also arise when the mental competence of a grantor of deed
is called into question; when wills are not properly probated or are
misinterpreted; when a title was transferred by a minor; or when a grantor
of a deed did so while under undue influence.
Fraudulent
activity such as forged signatures or fraud in the execution
of documents, the use of false powers of attorney in the execution of
documents, false impersonation by someone claiming to be the owner of
the property or any other fraudulent activity can invalidate any title
work that occurred from that point on.
Prospective
buyers should be certain they know what issues affect the title of the
property they plan to buy and recognize that even new construction properties
can be subject to these same kinds of problems. Buyers should make sure
that all issues that come to light from the title search are adequately
resolved prior to the closing.
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What
does title insurance cover?
Once the title search has been concluded and curative work to resolve
any issues has been completed, title insurance can then be issued. The
title insurance policy protects policy owners against covered financial
losses associated with claims against the title that were not discovered
during the title search process. It also insures against the title being
rejected by the subsequent buyer of your property due to pre-existing
title defects and covers losses that may arise after the property is sold
if title covenants were included in the sales contract. This includes
attorney fees and costs associated with defending the title and insures
that the policy holder is the legal owner and has access to the property.
Since the final title insurance policy may have some coverage exceptions,
policy owners must carefully read the coverage information for their specific
policy provisions.
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Who
is covered by title insurance?
There are two different kinds of title insurance policies, and each covers
a specific type of policy owner:
Lender’s
(or loan) title policies are required by lenders and paid for
by the borrower(s) at the closing. However, these policies only protect
the lending institution in the event a title problem is later uncovered
and causes a financial loss. Lender’s title insurance covers institutions
up to the amount of the mortgage loan associated with the property,
but makes no provision for the borrower’s losses.
Owner’s
title policies are not required for homebuyers, and in many
jurisdictions an Owner’s policy is not offered during the mortgage
process. As a result, homebuyers are left without title risk coverage
and often don’t know they had a choice. Without an Owner’s
policy, homebuyers must pay for title curative work out-of-pocket including
legal fees and the equity they have in their property can be at risk.
However, with an Owner’s title insurance policy in effect, the
homeowner’s investment is fully protected since the policy usually
covers buyers up to the full sale price.
Lenders
title policies and Owner’s title policies cover many of the same
things. In both cases, the policy holders are protected from title risks
such as title search errors, claims by missing heirs or ex-spouses,
forged signatures in the chain of title and many other title problems
that could go undetected before the closing. Attorney fees and settlement
costs are also covered up to policy’s limit.
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Why
do you need title insurance?
To protect probably the most important investment you’ll ever make-
the investment in real estate. A lender goes to great lengths to minimize
the risk of lending money for the purchase of real estate. First, credit
is checked as an indication of the borrower’s ability to repay the
loan. Then, the lender seeks assurance that the quality of the title to
property to be acquired and which will be pledged as security for the
loan is satisfactory. The lender does this by obtaining a loan policy
of title insurance. Doesn’t it make sense to protect your interest
as well?
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The
loan policy does not protect the borrower.
The loan policy protects the lender against loss due to unknown title
defects. It also protects the lender’s interest from certain matters
which may exist, but may not be known at the time of the sale.
But,
this policy only protects the lender’s interest. It does not protect
the borrower. That is why a real estate purchaser needs an owner’s
policy, which can be issued at the same time as the loan policy, usually
for a nominal one-time fee.
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What
is the danger of loss?
If the lender has title insurance protection and owner does not, what
possible danger of loss exists?
As
an example, assume real estate was purchased for $100,000. A down payment
of $20,000 is made, and a lender holds an $80,000 mortgage lien, or beneficial
interest. The lender acquires title insurance protecting the lender’s
interest up to $80,000, but the purchaser’s down payment of $20,000
is not covered.
What
if some matter arises affecting the past ownership of the property? The
title insurance company would defend and protect the interest of the lender.
The purchaser, however, would have to assume the financial burden of his
or her own legal defense. If the defense is not successful, the result
could be a total loss of title.
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How
can there be a title defect if the title has been searched and a loan
policy issued?
Title insurance is issued after a careful examination of copies of the
public records. But even the most thorough search cannot absolutely assure
that no title hazards are present, despite the knowledge and experience
of professional title examiners. In addition to matters shown by public
records, other title problems may exist that cannot be disclosed in a
search.
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What
title insurance protects against.
Here are just a few of the most common hidden risks that can cause loss
of title or create an encumbrance on title:
·
False impersonation of the true owner of the property
· Forged deeds, releases or wills
· Undisclosed or missing heirs
· Instruments executed under invalid or expired power of attorney
· Mistakes in recording legal documents
· Misinterpretations of wills
· Deeds by persons of unsound mind
· Deeds by minors
· Deeds by persons supposedly single, but in fact married
· Liens for unpaid estate, inheritance, income or gift taxes
· Fraud
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What
protection does title insurance provide against defects and hidden risks?
Title insurance will pay for defending against any lawsuit attacking the
title as insured, and will either clear up title problems or pay the insured’s
losses. For a one-time premium, an owner’s title insurance policy
remains in effect as long as the insured, or the insured’s heirs,
retain an interest in the property, or have any obligations under a warranty
in any conveyance of it. Owner’s title insurance, issued simultaneously
with a loan policy, is the best title insurance value a property owner
can get.
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