If you are in the process of buying a home, you probably have seen references to title insurance. Title insurance is a critical part of closing on the purchase of property. Learn more about title and its importance, and better understand the purpose of title insurance and process for obtaining it.
“Title” is the umbrella term for legal ownership rights. If someone has a clear title to a property, that person legally owns the property and can exercise associated ownership rights, which include possessing, using, selling or leasing the property. Title also refers to the legal document that identifies the owner.
Title of a property must be transferred if it is sold.
Title can be held in one of several forms. The type of real estate title affects the transferability of the property rights.
- Fee simple: The holder of a title in fee simple has sole ownership. This title holder can sell or transfer part or all of the property. She or he also can transfer ownership by will upon death.
- Joint Tenancy: In a joint tenancy, two or more owners hold an undivided share in the property. If one joint owner dies, then that owner’s interest in the property passes to the surviving owners.
- Tenancy in Common: In a tenancy in common, each individual owner has an undivided interest in the property. There is no right of survivorship, so an owner can transfer his or her ownership interest to someone else through a will.
- Tenancy in the Entirety: This title can only be created by a married couple and is similar to a joint tenancy. Some states no longer allow this form of title, and married couples instead must assume a joint tenancy with right of survivorship.
Title insurance protects property rights.
Unlike other forms of insurance that protect you from future occurrences, title insurance protects the policy holder from past events that might jeopardize claims to ownership in the future.
Most home sales involve the services of a title company. That company conducts an exhaustive search of public records to verify that a seller has the legal right to sell the property to a buyer. The title company backs its verification with title insurance. Title insurance protects the policy holder, which could be the lender, owner, or both, in case someone makes a future claim to the property.
In the event of a future claim, the title insurance will pay for covered losses and expenses associated with fixing the issue. This insurance only covers defects to the title related to circumstances or actions before title transferred to you.
Title problems, or defects, come in many forms. Some title problems relate to encumbrances on the property itself, and some title issues concern the current owner’s finances. Some items that could impact ownership of the property include the following:
- Unpaid property taxes
- Unpaid mortgages
- Liens on the property due to child support, outstanding taxes, or unpaid construction costs
- Missing or unknown heirs who might contest disposition of the estate
- Undiscovered easements or rights of way limiting use of the property
- Property survey errors
- Forged documents
- Clerical or filing errors of public documents
Title insurance usually is obtained as part of the home buying process. After a seller accepts an offer to purchase and the buyer deposits funds into escrow, a title company is engaged. A title specialist will conduct a thorough review of public records related to the property and its ownership. Any encumbrances discovered on the property are identified. Title professionals resolve some issues at this stage; about 25 percent of all residential real estate transactions have title issues that are resolved before closing. The title company prepares a preliminary title report identifying the property, ownership, issues with the title, and proposed policy. If the buyer agrees to accept the proposed policy, with the included exceptions to title, then the purchase of the title insurance is included in the closing costs.
As part of the negotiation process, a buyer can add contingencies to the purchase agreement that require the seller resolve some of the encumbrances. For example, the seller might be required to pay outstanding property taxes or the buyer can choose to walk away from the purchase.
Title insurance can be purchased for the owner or the lender.
Nearly all mortgages require a loan policy, usually based on the loan dollar amount, to protect the lender’s interests in the property in case a title issue arises. As the mortgage is paid down, the policy amount decreases annually.
To protect you as a buyer, you need to purchase an owner’s policy. The policy typically is issued in the amount of the purchase price. An owner’s title insurance policy protects you from title-related issues for as long as you or your heirs still hold an interest in the property.
Title insurance is purchased as part of the closing costs. It is paid as a one-time fee. Whether the buyer or seller must pay the costs related to the policy, including the title search expenses, varies from state to state. On the east coast, buyers tend to cover the costs, while sellers typically pay on the west coast.
The cost of title insurance depends on the selected title company, specifics of the policy, and the price of your purchase. Generally, expect to pay between a few hundred and few thousand dollars.
The real estate process, from start to finish is an intimidating process with a lot of moving parts. With LemonBrew, you know you will be taken care of along your entire real estate journey. Not only will we navigate the title search and review with LemonBrew Abstract, but we will match you with your perfect, local real estate agent and help you find the best mortgage options for you. For everything real estate, get started today!