When you’re purchasing a property, whether a home or investment property, you need title insurance to make sure that you have clear title to the property. This means that not only are you the rightful owner after the purchase, but that no claims will surface later requiring you to pay money you had no idea was owed on the property.
Title insurance protects your investment in a property, and is issued once a title examiner, usually an attorney, has reviewed all documents affecting the title to your property. The amount of the insurance is the purchase price you paid for the property, less any mortgages you used to finance your purchase. This is so because in most instances, the company insuring your title is also insuring the amount of the mortgage to the lender through a mortgagee title insurance policy.
A title examination is an inspection of documents affecting title to a property which have been recorded in the public records of the county where your property is located. They are indexed by the legal description to your property. A legal description is not the same as your property’s street address. In addition to indexing documents by legal description, the records will also index documents in which the current and prior owners of the property are mentioned. The records themselves are maintained by the county government.
A title examiner will inspect copies of each document affecting your property and those indexed to all prior owners for a period of at least thirty years. During the examination, the examiner will make sure that all deeds conveying title to successive owners were signed by the appropriate persons having title to the property, and were signed in a manner valid under the laws of your state to transfer title. The examiner will also make sure that any outstanding mortgages during that same period have corresponding satisfactions of mortgage-for every mortgage, there must be a satisfaction or your property is still securing the mortgage.
But mortgages are not the only thing that can leave your property open to claims; taxes and assessments can also become claims or liens if not paid. The examiner will make sure that all past taxes on your property have been paid up until the time the property is transferred to you. After the transfer, you, of course, become responsible for paying them.
The examiner then reviews documents indexed under the seller’s name which might result in a claim against the property. These include judgments for money or failure to pay taxes to the IRS. In the case of judgments, the examiner will make sure that the judgments have either been paid, will be paid before the transfer, or do not belong to your seller. IRS liens for taxes owed by the seller are recorded as Notices of Federal Tax Liens; the examiner will make sure the tax has been paid since the Notice was filed, or is collected at escrow (or closing) and sent to the IRS. Once the IRS receives payment, it will issue a Release of Tax Lien which will be recorded in the county to clear the lien.
What happens if your examiner did all these things but you still get a claim against your property? That is where the title insurance policy will help you. You file a claim with the title insurance company. The company will investigate the claim, and try to resolve the matter in your favor at no cost to you. If it can’t resolve the matter and you lose the property, then the company will pay you the purchase price less any amount it has to pay the lender-the company will also pay the lender the amount of its mortgage since now the lender has no valid mortgage against that property.
The cost of title insurance is inexpensive when compared to the cost of the property. It is a wise investment and one you should make sure to have when purchasing a property.