Real estate is one of the largest industries and is an essential part of the health of the U.S. economy. Many real estate transactions come with risks, and this is where title insurance comes into play—protecting home buyers from hidden title hazards that may threaten their financial investment in real property. Title insurance has been protecting American homeowners for more than 125 years. As the industry grew, title companies began providing essential services to real estate buyers, sellers, lenders, brokers, attorneys, developers, builders, and others. Title insurance allows for a secure transfer of ownership for both the buyer and the seller. It is not as well understood and is much different from most traditional insurance policies, which can lead to a misunderstanding of the service. Title insurance protects home buyers against covered title defects, such as a previous owner’s debt, liens, and other claims of ownership. It’s an insurance policy that protects against past problems, whereas other insurances usually deal with future risks.
What Is Title Insurance?
Title insurance can seem like another one of those mysterious fees buried inside a giant pile of paperwork a home buyer receives at the loan closing. When purchasing a home, the buyers are purchasing the right, title, and interest in the property—the right to occupy and use that space. A homeowner’s title may be limited by claims and rights asserted by others, which may limit the homeowner’s use and enjoyment of the property. Title insurance protects against these types of title hazards. It’s a form of insurance that protects homeowners against defects or problems with a title when there is a transfer of property ownership. Title insurance coverage can give homeowners some peace of mind in the knowledge that they’ll be excused from legal disputes tied to the property prior to their ownership.
A title search is the complete process of reviewing a property’s title. It’s an examination of public records to determine and confirm a property’s legal ownership and to ensure that no defects or conflicts could negatively affect the homeowner in the future. If the research company doesn’t find any outstanding claims or title defects, why purchase title insurance? It’s still important to have in case of a yet-undiscovered issue that could cause problems with the ownership of the property years after the purchase. Along with this, there might be a mistake in the ownership history, a previously unknown heir, and even an oversight committed by the title researcher. A title defect that arises after a closing could, at the very least, mean a variety of legal costs—and, in a worst-case event, the loss of the buyer’s property and the money the buyer has put into it. Along with this, title insurance protects you against hidden risks such as fraud and forgery, liens or deeds, things that the title examiner could have missed. It is also the title insurance’s responsibility to determine the validity of the documents. Title insurance provides long-term protection for an owner’s and a lender’s interest in the property. It simplifies the transfer and closing process all while assisting with the resolution of issues that may weaken the validity of the title to a particular property.
Acquiring Title
Ownership of a property is represented by a legal document such as a deed or certificate of title. Legal title allows one to control or dispose of the property. There are numerous ways by which people can acquire title, and the laws vary by state. Below are some common methods to acquire real property:
- Sole ownership is the simplest way to hold title to a property. It occurs when one person alone holds title, and it is most often used by people who are single. But in some cases, married people can choose sole ownership if one spouse is willing to sign a document renouncing any rights to the property.
- Tenancy in common occurs when two or more people each get to own a percentage of a property. An owner can sell his or her percentage share of the property at any time. The property does not revert to the other owners automatically if one of the owners dies.
- Joint tenancy with rights of survivorship occurs when two or more people jointly hold the title. The deceased’s interest in the property will automatically transfer to the surviving tenants without the need for probate. If only one joint tenant survives, the title becomes sole ownership.
- Tenancy by the entirety occurs when a married couple is treated as a single entity, so each individual is entitled to 100 percent of the interest in the property. An owner cannot alter ownership of property without the other’s consent. Each of the married partners has full right to the property should the other die.
- Community property is property acquired while the owners are married, with each of the partners owning half the property. This can be done in only nine states in the United States. Each of the partners can will his or her half of the property to someone else, unless the community property is owned with right of survivorship.
- Trusts are arrangements whereby legal title to property is transferred by a grantor to a person called a trustee, to be held and managed by that person for the benefit of the people specified in the trust agreement; this arrangement can reduce taxes on the estate in the event of the owner’s death. However, there is some cost to creating and maintaining the trust. An estate attorney can assist in establishing a trust.
- Corporations, limited liability companies (LLCs), and partnerships can hold title to a property. Each has different rights and arrangements that affect the title. Seek legal counsel to make an informed decision.
Lender vs. Owner Policies
When dealing with title insurance, lender policies and owner policies are the most common. Lender’s insurance, also known as loan policy, assures the lender of the validity, priority, and enforceability of its lien (mortgage)—serving as protection for the lender’s security interest in the property. It protects lenders up to the amount of their outstanding debt on a mortgaged property. This insurance does not protect the homeowner’s investment in the home. If someone was to sue with a claim against them, they are the ones responsible. This insurance is required while owner’s title insurance is optional, but both policies are typically offered as a bundle together.
An owner’s policy protects homeowners from claims against the title that predate their purchase of the property. This insurance is critical because it protects them if a title issue arises during or after a home purchase. It is issued in the amount equal to the home’s purchase price, and the purchaser pays a one-time fee at closing. This insurance makes the insurance company responsible—subject to the terms of the policy—both legally and financially up to the policy limit. Although owner’s title insurance is technically optional, most attorneys recommend buying it for added protection and peace of mind. It does not terminate when the mortgage loan is paid in full or refinanced. It’s there to protect homeowners against losing their equity and right to live in the home if a claim arises after the purchase. It also helps when they eventually want to sell their property. If a title issue were to arise at this time, the policy would ensure that the sale will proceed by offering insurance to the new buyer or lender. Yet, it doesn’t protect homeowners against all possible infringements on their property rights. It doesn’t protect against title problems caused by one’s own actions. It also doesn’t protect homeowners against eminent domain, which is when a government seizes private property for a public purpose.
