Basics of Title Insurance

Title insurance policies help to protect all the participants, both the buyer, seller and lending institution, against fraud and any other problems that might arise in property ownership. There are two types of policies: an owner’s policy that protects the interests of the owner of the property as well as a lender’s policy, which protects the lender who holds a secured loan. Title insurance specifically protects against false or faulty claims of ownership, for example fraud, missing heirs, or active liens. In the case of fraud, an unscrupulous individual could be posing as someone, hoping to pull off an act of identity theft, perhaps through forgery. Missing heirs are people who have legally inherited ownership of a property but cannot be located. Lien issues usually involve unpaid property tax, IRS judgments or other claims.

Why Title Insurance Is Important

Title insurance not only protects parties from ownership disputes, it can also address issues such as easements and encroachments, which are similar property issues that might come up in negotiation. Title insurance does not protect against every possible scenario; it strictly relates to the legal title of the property. Therefore, while encroachments or ownership claims would be covered by a policy, other physical issues such as soil subsidence or flood damage, would not be an issue of the title insurance policy. What makes title insurance unique among most insurance types is that it protects the insured against past instances, not future events. Legality involving a property title may go back over 50 years! Title insurance protects a property and its new owner by insuring against yesterday’s claims today.

A lender’s policy is effective as long as the loan is active, while an owner’s policy is effective as long as the owner owns the property. What happens if the loan is refinanced? The owner’s policy will remain in effect while a new lender’s policy will be issued to most current lender. Even if the same lender chooses to refinance the loan a new policy will be required, as the original loan has already expired. Title insurance is very important to the new lender, because if foreclosure should occur, the lending company must be able to legally own and then resell the home without any other claims of ownership slowing the process down. The owner also needs protection against any possible ownership claims from outside. If there is a claim made the title insurer will investigate it and resolve the claim. Even if the worst is true and somebody else does have legal rights to the property the title insurer has to compensate the owner for any losses.

How To Buy Title Insurance

The process begins with the title insurance company issuing a policy after they complete a search on the property’s history. They perform this search to find out any problems or discrepancies in the chain of title ownership. After the search an examiner reviews the information and then issues a title policy. If there is a problem in the search then the process is delayed, or perhaps even denied. For example, an outstanding tax lien or another mortgage that was never paid off (at least according to past records) would have to be investigated, since legally speaking, the most current owner is not the documented owner. Most lenders will avoid a legal hassle and deny financing if a property title cannot be insured due to a sketchy history.

At this point either the buyer or seller (as per their agreement) pays the premium, a one time fee only for the insurance policy. An owner’s title policy can be purchased for an additional cost along with an lender’s title policy. If the loan is refinanced within a few years the insurer will sometimes discount the cost of the search since it has been done before and will most likely be a very simple task. The insurer then sends the title policy to the buyer by U.S. mail after the transaction closes. Homeowners are advised to keep title policies – and all official documents pertaining to the mortgage in a safe place. If you have any questions as to your homeowners insurance policy or the lender’s, then ask questions before finalizing the deal. There are no dumb questions, since mortgages can be complicated and involve many legal processes that can’t be easily undone. Title insurance protects the lender, borrower and seller and makes sure the closing goes smoothly.