Real Estate Law: Do I Need Title Insurance?
All your hard work has paid off. You just found your dream house. You even managed to get a deal on it. All right maybe you didn’t, maybe you paid twenty percent over the list price. But it’s your dream house and you’ll figure out a way to come up with the extra twenty percent. You’ll cut expenses, starting with that thing called title insurance. The house is in the city, it has had the same owner for the last forty years, so how could there be any problems with the title?
What is “title” and why do I need to insure it?
When you buy a piece of land, you don’t get handed the piece of land. Rather you are given title. Title is the owner’s right to possess and use the property. How a home is titled can vary. For example, title might be held as tenants in common, as joint tenants, there may be a right of survivorship, or there might be a life estate in the home. In addition, as you might imagine, there are many uses for land and rights can be given or sold for such uses. Someone other than the person you think of as owner of the property may own mineral, air, or utility rights on the property you are interested in. A bank with a mortgage on the property owns an interest in the property as does someone who has done work on the house and filed a lien against it. The government may also have liens against the property for unpaid taxes and the city may have an easement giving it the right to string utility lines across the front yard.
A title search will reveal many of these potential problems. A title search is done by examining public records to look up the history of property ownership. You can do your own title search, assuming you know what to look for, but if you are getting a loan to enable you to purchase the property, the lender will require that a qualified third party do the title search. The title search shows not only limitations on the use of the property and rights others may have in the property, but also liens or monetary obligations that are outstanding against the property.
Once you know whether there are limitations on the use of the property or liens against the title, you may wonder why you cannot just deal with those issue before you purchase the property? Why would you need insurance once you know about all the problems? Isn’t it like buying fire insurance after your house has burned down? In fact, buying title insurance is a little like buying fire insurance on your burned down house.
Most people are familiar with the type of insurance policy that covers events that have not yet happened. Automobile liability insurance, medical insurance, life insurance are examples of insurance policies that cover events that have not yet happened. Usually, these policies exclude events that occur before the date the policy is issued. Thus, you cannot get life insurance on someone who has already died, and you will not find an insurance company willing to give you insurance coverage for a car accident that has already occurred. Title insurance, on the other hand, covers events relating to the title that have already happened. It does not cover anything that happens to the title after the date of issuance. If you have liens filed against the property for taxes that you didn’t get around to paying, your title insurance policy is not going to help you. But, if the lien is for taxes not paid by the guy who owned the house eighty years ago, then you may have coverage under your title policy.
Before offering to issue a title insurance policy, a title company will do a title search to learn whether there are any problems or limitations with the title. This search is done in effort to minimize the risks of offering insurance. By minimizing the risks of claims being made, a title insurance company is able to offer its insurance policies for a relatively low, one-time fee. Problems such as deeds, wills, and/or trusts that contain improper vesting and incorrect names, outstanding mortgages, judgements, and tax liens, easements, or incorrect notary acknowledgments are generally found through the title search and usually can be cleared up before the closing on the property. When these problems are not cleared they will often be listed as exceptions to the policy’s coverage. You would then need to decide whether the property is still something you want to purchase given the known problems with the title.
Perhaps you are wondering what the point of title insurance is if the title company won’t cover known problems with the title. Isn’t it like buying medical insurance that won’t cover you if you get ill? The answer is “not really”. There can many problems with a title that even a diligent and trained eye may not uncover during a title search.
Examples of problems that can come up after you purchase your property include fraudulent acts by prior owners, such as forged documents that transfer no title to the real estate, forged mortgages, or forged satisfactions or releases of mortgages, impersonation of the true owners of the land by fraudulent persons, and/or instruments executed under expired or fabricated power of attorney. In addition, the deed may have been executed by someone who forgot to get divorced before he remarried, who forgot he got divorced and has inherited the property as the surviving spouse, or who forgot that he already sold the property to another purchaser who is now in possession of the property. Or perhaps you have acquired perfectly good title to a piece of property for which there is no legal access.
Other problems that may occur include execution of the deed by someone who is a minor or otherwise not competent, mistakes in public records or mistakes in recording the legal documents. Such mistakes can include incorrect indexing, errors and omissions in transcribing due to similarity in names, and failure to preserve original instruments. In addition, defective acknowledgement due to lack of authority of notary; descriptions that appear to be, but are not, adequate; erroneous location of an ancient pipe or sewer line which does not follow the route of a granted easement; invalid, suppressed, undisclosed and erroneous interpretations of wills; previously undisclosed heirs with claims to the property; tax titles which are invalid because of irregularity in the proceeding; liens for unpaid estate, inheritance, income or gift taxes and/or special assessments which become liens can also impact on the use and enjoyment of your property.
Although the events that cause these types of problems happened before you purchased the property, a good title insurance policy will provide coverage for the consequences of these events as they affect your ownership of the property. There are two types of policies available, a lender’s policy and an owner’s policy. Your lender will probably require that you obtain a lender’s policy. The lender requires this because the loan is made with the property as security. Any defect in the title of the property affects the value of the lender’s security. Because the lender is only interested in protecting its security, the lender’s policy only covers the amount of the loan. As you pay back the loan, the value of the lender’s policy decreases.
Your equity in the property is not covered by the lender’s policy. As time goes by and you dutifully pay back your loan, your exposure increases, unless you have an owner’s policy. An owner’s policy covers the total amount of the value of the property at the time the property is purchased. The cost of such a policy is relatively low since the increase in the risk for the title insurer is not much greater than if it only insured the lender’s interest. Since your interest, unlike the interest of the lender, may increase over time, you may want to consider purchasing an inflation rider that will adjust your amount of coverage to reflect the increase in the value of your property over time.
The coverage of your policy is not just limited by the face amount of the policy. As noted above, there may be other restrictions on the policy that will be set forth in the “exceptions” section of the policy. These exceptions are usually for items that were discovered, but not resolved, prior to the closing. The exceptions may also include some standard items for which you may be able to purchase extended coverage.
In the event that there is a claim against your rights of ownership in the property, your title insurance company will cover the cost and fees associated with defending against the title claim. The policy will also cover, up to the face amount, any loss of title or the cost of perfecting the title. Without title insurance, you may be faced with huge legal fees and costs and even the loss of all or a portion of your dream home.
There are many things that can affect your ownership rights to your new home. Tax and mechanics liens, fraud, and mistakes can cost you money and strip you of your ownership rights. For a one-time fee, title insurance can provide coverage for these types of problems. The coverage lasts for as long as you and your heirs hold title to the home. When you put it into perspective, it is a small price to pay for peace of mind concerning one of the biggest investments you will probably ever make.
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