Real estate purchases may be complex. Homebuyers should, among other things, deal with title insurance. This insurance is intended to protect lenders and buyers from financial losses if there are defects in the title to property.
Title insurance is protection because clear titles are required for real estate transactions. Title companies engage in a search on every title to determine whether there are claims or liens before a clear title may be issued. In a title search, an examination of public records is conducted to determine and confirm legal ownership of property and whether there are claims on the property.
Back taxes liens and conflicting wills are among the most usual claims against titles justifying title insurance. Title insurance also provides protection against these typical hazards:
- Another party’s ownership
- Forgery, fraud, and incorrect signatures on documents
- Records with flaws
- Restrictive covenants like unrecorded easements
- Outstanding lawsuits, liens and other encumbrances or judgments against property
- Unresolved building code violations
- Erroneous surveys
Reasons to purchase
Parties without title insurance expose themselves to substantial risk if there is a title defect. Without title insurance, for example, a homebuyer may have to pay any unpaid property taxes owed from the previous owner or risk losing the home to the taxing authority.
Lenders title insurance covers banks and other mortgage lenders from defects such as unrecorded liens and access rights. Lenders are covered up to the mortgage amount if there is a borrower’s default and there are issues with the property’s title.
Real estate investors should assure that the property has a good title before going forward with its purchase to protect themselves against unforeseeable claims against the title. Homes in foreclosure, for example, may appear as a bargain purchase but can have numerous outstanding issues.
Types of title insurance
Lender’s title insurance and owner’s title insurance including extended policies are the two types of title insurance.
A lender’s policy protects the lender against loss. Most lenders require borrowers to purchase a lender’s title insurance policy for protecting the lender if the seller cannot legally transfer title of ownership rights. An issued policy indicates the completion of a title search which may provide some assurance to buyers.
Owner’s title insurance is the second type. This provides additional protection because title searches are fallible, and owners face the risk of loss. Owner’s title insurance is optional, and sellers often purchase it to protect buyers against title defects.
Instead of title insurance, a warranty of title may be used in some transactions. A warranty is a seller’s guarantee to a buyer that the seller has the right to transfer ownership and no other party has rights to the property.
Escrow or property agents usually begin the insurance process when the property purchase agreement is completed. National and regional title insurance companies sell policies.
Costs range from $500 to $3,500 depending on location, the insurance provider and the home’s purchase price.
A lender’s policy and owner’s policy are often required to guarantee everyone’s protection. At closing, parties purchase title insurance for a fee. To prevent abuse, the Real Estate Settlement Procedures Act prohibits sellers from requiring the purchase of insurance from a specific title insurance carrier.
Attorneys can help parties deal with the many large and small details of a real estate transaction. They can help assure that legal requirements are met and that interests are protected.