All You Need to Know about Title Insurance

Purchasing a house ranks among the most significant financial decisions one can make, whether it marks the acquisition of a first property or a forever home. Safeguarding this investment is paramount, and here’s where title insurance plays a pivotal role.

What Is Title Insurance in Real Estate?

A title serves as a property’s report card, documenting its ownership history and confirming payment records. Unlike homeowner’s insurance, which guards against future property damage, owner’s title insurance shields against past events that might threaten your ownership, such as overlooked liens, encumbrances, or title defects. Similarly, lender’s title insurance safeguards your loan company’s interests and is often mandatory for mortgage approval.

While many title insurance firms adhere to the standard policy established by the American Land Title Association, some offer slightly modified or enhanced coverage. As a homebuyer, you have the discretion to choose your title insurance provider, with local expertise and customer service quality being crucial considerations, according to Marcus Ginnaty, a spokesperson for First American Title Insurance Company. Although owner’s title insurance isn’t compulsory, it stands as your primary defense against potential issues that could jeopardize your property rights and financial well-being.

Understanding Title Issues: What Can Go Wrong with a Home’s Title?

Are you aware of the first owner of your home and whether all taxes were duly paid? If not, a title search becomes imperative. Throughout a property’s history, it may accumulate unpaid debts, become entangled in forgery incidents, or face boundary disputes, among various other challenges categorized as title defects. Illegitimate past deeds or undisclosed wills unveiling missing heirs could challenge your ownership status. Even if a property has undergone multiple ownership changes, such issues might have been overlooked in prior searches, leaving them unresolved. As Marcus Ginnaty highlights, this underscores the significance of title insurance coverage.

How Title Insurance Protects You: Claims and Common Coverage Scenarios

While the title company aims to address any title defects before the sale is finalized, challenges may surface post-sale, necessitating financial or legal interventions. With title insurance, you may be shielded from bearing legal expenses arising from unforeseen issues. The extent of your coverage and any exceptions to the policy could differ based on your state regulations and insurance provider. However, typical title insurance policies often cover the following common claims:

Financial Encumbrances

A financial encumbrance refers to any monetary claim placed on the property, such as unpaid mortgages, taxes, construction expenses, or existing equity lines. If, for instance, a hidden maintenance lien from a previous owner’s kitchen renovation emerges post-closing, your title insurance policy safeguards you from covering the amount or associated legal costs independently.

Easements and Access Issues

While most easements are typically addressed during the search and survey phases, there are instances where unrecorded easements might affect your ownership rights. If a neighbor asserts that the former owner granted them an easement on your property, your title insurance policy could provide some protection and aid in covering legal expenses if the matter escalates.

Disputed Claims of Ownership

Ownership disputes can arise through various avenues. If a missing heir or previously undisclosed will surfaces, it could trigger a contention over rightful ownership, a matter your title insurance provider can assist in resolving. Similarly, disputes may emerge regarding land ownership predating your home’s construction, with someone asserting proof of ownership over the land. Boundary issues, although potentially detectable early through a thorough survey, can also fuel ownership disputes.

Fraud and Forgery

Instances of fraud and forgery, such as fraudulent sales, forged deeds, wire fraud, or identity theft, can disrupt the homebuying process significantly. For instance, if you uncover post-closing that the previous owner’s spouse forged the husband’s signature on the home sale documents, while illegal, it doesn’t nullify the sale or your ownership rights. In such cases, your title insurance policy can cover the associated legal fees required to address the issue.

Closing, Search and Public Record Errors

Title examiners, underwriters, and lawyers are fallible humans. Regrettably, errors during the search or closing process can occur, underscoring the significance of having title insurance. Even minor mistakes like a misspelled name or inadequate notarization can impede your property ownership status. However, your policy serves as a safeguard, protecting your interests while rectifying the paperwork issues.

Does Title Insurance Cover an Existing Mortgage?

Title insurance is typically procured at the time of closing, meaning it’s not typically applied to existing mortgages. “While obtaining coverage later is feasible, requesting it post-closing can present difficulties,” Ginnaty explains. However, when refinancing your home, a new policy can be obtained, and the title company can modify its coverage to accommodate any augmented property value.

Is Title Insurance a One-time Cost?

Yes, you only need to pay for title insurance once, and the coverage remains in effect for as long as you own the property. Both lender’s and owner’s insurance can be purchased simultaneously, but the premiums vary based on factors like the property’s cost and the mortgage amount. According to Forbes, these costs typically range from 0.5% to 1% of the home’s purchase price. With the national median home price around $384,000 as of March 2024, the average title insurance policy may range from $1,920 to $3,840. Ginnaty notes that some providers offer enhanced policies like First American’s Eagle Policy or an ALTA Homeowner’s Policy, which offer broader coverage for additional risks but often come at a slightly higher cost.

The Role of the Title Company: Facilitating a Smooth Closing

After finalizing the property purchase agreement, the closing attorney typically begins the process of initiating the title insurance policy. They collaborate directly with the title company and underwriter to ensure all procedures are conducted accurately and promptly. While most title searches are completed within a few days, resolving severe or complex defects may extend the timeline. In rare instances where there’s a complicated history to sort out, the resolution might delay the closing by a few days, though such occurrences are infrequent, according to Ginnaty.

The Title Search Process: How Title Insurance Companies Investigate Ownership

Title examiners meticulously review comprehensive public records to track a property’s ownership history, guaranteeing that your house remains exclusively yours. Often, the process of rectifying any title defects, like outstanding liens, occurs discreetly, without the homebuyers’ knowledge, as Ginnaty explains. However, by obtaining an owner’s title insurance policy, you secure protection against a wide range of potential expensive claims that may arise post-closing on your new home.

What is a Title Defect? Understanding Common Ownership Problems

A title defect encompasses anything that jeopardizes an individual’s sole right to own or transfer a property and can stem from deliberate fraud or inadvertent errors. Regardless of the cause, these defects must be rectified before a property sale can proceed. Here are some common ownership issues that can result in title defects:

• Liens, which include unpaid taxes, mortgages, utility bills, child support, maintenance fees, or any outstanding debts.
• Encumbrances, such as unidentified easements, disputed boundaries, or covenant restrictions imposed by a homeowners association (HOA).
• Clerical errors, such as misspelled names, inaccurately filed documents, or insufficient notarization.
• Fraudulent activities, including illegal deeds, forged signatures, falsified information, or impersonation of a previous property owner.
• Complications arising from an undisclosed will, which may trigger ownership disputes involving previously unknown or missing heirs.
• Any disruption in the chain of title, such as overlooked deeds of trust, improperly recorded data, or outdated survey reports.

What Happens If There’s a Title Defect After I Close?

Discovering a title defect post-closure could lead to costly and lengthy procedures to rectify the issue, potentially even involving legal action, as Ginnaty points out. Hence, having a title insurance policy becomes crucial, providing you with the means to file a claim regarding the newfound defect. For intricate matters, seeking advice from a real estate or closing attorney is advisable to navigate the situation and secure a clear title in the end.