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In real estate, the term "title" usually refers to the ownership of a piece of property. Title insurance is a policy purchased by the home buyer or home seller that protects the buyer or lender against any loss sustained as a result of an undisclosed title defect.
Common defects include someone other than the seller claiming an ownership interest in the property.
Why should you purchase title insurance? Many sales contracts require the seller to deliver good title to a home buyer. To determine the status, a seller or buyer will order a title commitment from a title company. To create the title commitment, the title company will search the public record for that property. If the title company fails to find an existing title defect, and the buyer is later harmed, the title company bears responsibility.
Many buyers are confused as to why they must purchase two separate policies. But the lender's title insurance policy does not protect the homeowner. It only covers the lender.
Here are some things to understand about title insurance.
Prior to receiving an owner's title insurance policy, a homeowner, or his or her attorney or agent, will receive a "commitment for title insurance." The commitment for title insurance will contain information that the home buyer or his agent must review prior to closing, including the name of the current owner of the property, the name of the proposed insured for the buyer's and lender's policies, the amount of the insurance, the legal description of the property, and items affecting title (like easements or liens) .
The buyer must make sure the amount of title insurance matches the purchase price for the home.
The amount of title insurance set forth in the policy is the maximum amount that the title company will spend to protect the homebuyer's interest in the home. If, for some unknown reason, there is a total loss which is covered by the title insurance policy, the buyer (now the homeowner) will receive no more than the amount set forth in the policy.
Some title insurance companies add inflation endorsements to title insurance policies which automatically increase the coverage on the home on a year-to-year basis.
The lender's title insurance amount must match the amount of the loan given by the lender to the homeowner.
The buyer should compare the legal description set forth in the title commitment with the legal description set forth on the plat of survey, which is generally delivered to the buyer at closing. By comparing these two documents, the buyer can be sure that the title commitment and the depiction of the property on the plat of survey are the same.
In a few cases, some liens (either mechanic's or tax) may remain on the title, but the title company will issue an endorsement to the title insurance policy indicating that the homeowner will be protected against the claims of the lien holder, should the lien holder prevail in the lien holder's claim against the property.
Utility easements are rights given to utility companies to allow for sewer, water, gas, electrical, telephone, and cable service to the property and other properties. Special care should be used when reviewing these easements to make sure they do not place undue burden on the home.
A utility easement that affects the edges of a property is generally acceptable, but a utility easement that affects the constructed home might be quite problematic. If the easement allows for the demolition of your addition in order to install other utility lines, and the home is built over the easement, the easement owner can force the demolition of the home.
There are many other types of restrictions and documents that may affect title to a home. The person representing the homebuyer (preferably the attorney) should review all of the documents listed in the title insurance commitment prior to closing.
If, after reviewing the title commitment, the commitment is acceptable, then the home buyer closes on the home. Any matter, like an easement or lien, listed on the title commitment will then be listed in the title insurance policy.
If one of these listed items boils up after closing, the buyer will not have recourse against the title insurance company. However, if something new appears on title that was not cause by the home buyer and existed on title prior to the closing date, the title company generally has an obligation to protect the homeowner and pay him or her for any damages sustained.
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